Category Archives: Martin Wolf

(FT) Central banks alone cannot deliver stable finance – Martin Wolf

Central banks alone cannot deliver stable finance

Date published: 24 October 2017

Martin Wolf



Favourable global economic prospects, particularly strong momentum in the euro area and in emerging markets led by China and India, continue to serve as a strong foundation for global financial stability.” This statement opened the International Monetary Fund’s April 2007 Global Financial Stability Report. Since this benign view was published on the eve of the most devastating financial crisis in nearly eight decades, it has to be viewed, in hindsight, as a spectacular misjudgment. The fund is determined not to be caught out again. The question is whether the concerns it pours forth in its latest Global Financial Stability Report are well judged or whether it is crying wolf. As important, what might be the implications, especially for policy, of its worries?

The underlying argument of the report is that “near-term risks to financial stability continue to decline”, but “medium-term vulnerabilities are rising”. The return of global economic growth, combined with comfortable monetary and financial conditions, together with sluggish inflation, strengthens investors’ reach for yield and appetite for risk. With market and credit risk premiums at decade-low levels, asset valuations are vulnerable to a “decompression” of risk premiums — in blunter words, a crash.

As the report notes, shocks to credit and financial markets well within the historical range could have large negative impacts on the world economy: “A sudden uncoiling of compressed risk premiums, declines in asset prices, and rises in volatility would lead to a global financial downturn.” Many hold the room for monetary policy manoeuvre to be limited. The result might then be a less deep, but still more intractable, global recession than that of 2009.

It has to be possible for the financial system to cope with changes in asset prices without blowing up the world economy. This should not need saying

One element in these risks is yield compression. Yields on investment-grade fixed income instruments have collapsed since 2007, with almost none now yielding over 4 per cent. This has also encouraged greater capital flows to — and so more borrowing by — emerging countries. Non-resident capital inflows of portfolio capital reached an estimated $205bn in the year through August 2017 and are on track to reach $300bn in 2017, more than twice the total in 2015-16. In addition, argues the fund, low yields, compressed risk spreads and abundant financing are encouraging a build-up of debt on corporate balance sheets. Reversals in these spreads could cause a jolt: to reach the average levels for 2000-04, market risk and term premiums would have to rise by about 200 basis points for investment-grade bonds. Market volatility is also highly compressed. (See charts.)

Possibly most important, leverage continues to rise across the world, notably in China. In the high-income countries, the net asset position of the private sector has improved somewhat since the crisis, but the governments’ has worsened. Moreover, assets are currently valued at high, quite possibly unsustainable, levels. Debt service burdens are generally low, at current interest rates. But this would change if those rates rose sharply. Moreover, in several economies debt service burdens in the private non-financial sectors are greater than average — notably in China, but also in Australia and Canada.

Such analyses bring worries into the open. This is helpful: the more worried people are, the safer the system. Yet it is also essential to tease out the implications of the fragility the fund describes so clearly. I would identify four.

First, investors must be very wary.

Second, it has to be possible for the financial system to cope with changes in asset prices without blowing up the world economy. This should not need saying. An essential part of achieving this is deleveraging and in other ways strengthening intermediaries, notably banks. That has indeed happened, but not, in my view, nearly enough.

Third, the generation of demand sufficient to absorb potential supply has become far too dependent on unsustainable growth in credit and debt and also on consumption (especially in high-income countries) or wasteful investment (as in China). We might break this linkage in several ways. One is to redistribute income, via the tax system, from savers to spenders. Another is to increase incentives for investment, especially by profitable businesses. Another is to remove the tax-favoured position of debt and rely more on equity financing throughout the economy. A final one is to rely more on government spending and borrowing, especially spending on public investment.

Finally, we should not conclude that central banks have to abandon the priority of stabilising the economy in favour of the possibly conflicting goal of stabilising the financial system. One reason is that monetary policy is a blunt instrument for achieving the latter. A more fundamental objection is that we cannot tell people they must remain stuck in a deflationary economy because it is the only way to stop the financial system from exploding. They will rightly respond that these priorities are wrong. Similarly, ensuring creditors get the returns they think they deserve is not the job of the central banks. If governments think creditors are so deserving, they should change taxes accordingly. Again, if they think the financial sector remains excessively unstable, they should regulate it.

Criticising the success of our central banks in reflating our crisis-hit economies, because this created today’s financial risks, is not a valid reaction to their actions. It is, however, an extremely valid criticism of finance. It is also a valid criticism of the failure of governments to address the many frailties that still lead to financial excess. The central banks did their job. Unfortunately, almost nobody else has done theirs.

Letters in response to this column:

Policymakers need a financial stability target / From Richard Barwell, BNP Paribas Asset Management, London, UK

Credit set to remain the machine’s oil and grit / From Quin Casey, Takapuna, Auckland, New Zealand

To receive alerts when Martin’s articles are published, go to his page here and click “add to myFT”

Copyright The Financial Times Limited 2017


(FT) Asia’s dynamism at risk in US and China’s competing visions for global trade – Martin Wolf


By Martin Wolf, Source:

Donald Trump, US president, asserts that “protection will lead to great prosperity and strength”. In contrast, President Xi Jinping of China insists that “we must promote trade and investment, liberalisation and facilitation through opening up – and say no to protectionism”. So what might this contrast of views mean for the future of the trade on which Asia’s dynamism has been built?

This question is of global significance. Today, the Asian region – east, south-east and south Asia – contains the world’s most dynamic economies, including the two rising giants, China and (albeit well behind it) India. The International Monetary Fund has forecast that the share of Asian emerging economies in world output (at purchasing power parity) will grow from a mere 9 per cent of the total in 1980 to 38 per cent in 2021, only fractionally smaller than that of the advanced countries.

The US commitment to liberal trade has provided the environment within which Asia has prospered. In all cases of rapid economic growth in this region, the expansion of trade has played a decisive role, via exploitation of comparative advantage, economies of scale, access to know-how and heightened competition.

The results have been dramatic, notably in the case of China. Its share of world exports of goods jumped from around 1 per cent in 1981 to 4 per cent in 2000 – just before it joined the World Trade Organisation in 2001 – and 14 per cent in 2015. Emerging Asia’s share of world exports of goods soared from 4 per cent in 1981 to 21 per cent in 2015. Meanwhile, Japan’s share has moved in the opposite direction, with a fall from 10 per cent in 1993 to 4 per cent in 2015. Overall, Asia’s share of world exports of goods (including re-exports) reached 33 per cent in 2015.

The WTO, established in 1995, and, before it, the General Agreement on Tariffs and Trade (1947) have provided the principal institutional framework for the growth of Asia’s trade. The GATT promoted the liberalisation of global trade through eight multilateral negotiations. The last to be completed under GATT was the Uruguay Round, agreed in 1994. The Doha Round, launched in 2001 and the latest under the WTO, remains incomplete.

Unlike in Europe, regional trade agreements have played a modest role in the development of Asia’s trade, the only significant exception being Asean (the Association of Southeast Asian Nations). In addition, a significant bilateral trade agreement does exist between the US and South Korea. Asean Plus Three (APT), however, which includes China, Japan and South Korea, is a co-ordinating body, rather than a trade agreement.

Notwithstanding some signs of recovery, the global trade engine has been running substantially more slowly since the financial crisis. From 2012 to 2015, average growth of the volume of exports of goods and services from Asian emerging economies was just over 4 per cent, well below the region’s average growth of GDP and far below growth achieved before the global financial crisis in 2007-08.

The world economy is not yet deglobalising. But it is no longer globalising. While protectionism has risen, it does not appear to explain the slowing growth of world trade. The absence of liberalisation seems more important, likewise the exhaustion of the opportunities for unbundling supply chains across frontiers. But the IMF argues that weak demand – particularly weak investment – is the most important explanation for the slowdown. This suggests that trade could pick up again, but such a recovery will also depend on trade policy.

Largely in response to the economic and political rise of China, but also recognising the failure of liberalisation within the WTO, Barack Obama decided to promote a US-led Trans-Pacific Partnership. The TPP was ultimately signed in February 2016 by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US – until it was renounced by Mr Trump on January 23 2017. (In April, officials said Tokyo was keen to pursue the TPP without the US.)

The TPP deliberately excluded the rising superpower, China; it included non Asia-Pacific countries; and it introduced a host of regulatory changes. US defenders of this agreement argue, correctly, that these (highly controversial) changes require far more of its partners than of the US.

Michael Froman, the trade representative who negotiated the TPP, has made the aims of the agreement quite clear. “The answer to this challenge [from China] is not to allow China to write the rules of the road for trade, but for the US to lead that effort,” he argued in September 2016. “The answer is not to allow China to carve up the markets of the future, but to level the playing field and give American workers and businesses a shot to compete and win.” This means the TPP.

Yet Hillary Clinton and Mr Trump were in agreement with one another in their opposition to TPP. Mr Trump duly withdrew support for it as soon as he took office, stating his intention to adopt a policy built on bilateral deals, even bilaterally balanced trade – an astonishingly primitive idea in a world of market-driven multilateral commerce. He appears to be intent on replacing multilateralism with bilateralism, liberalism with protection and predictability with unpredictability.

US withdrawal has offered China an opportunity. The TPP includes countries that generate some 25 per cent of world exports of goods. China is promoting a Regional Comprehensive Economic Partnership (RCEP) instead. The RCEP excludes the US and other TPP members from the Americas. But it adds Cambodia, China itself, India, Indonesia, South Korea, Laos, Myanmar, the Philippines and Thailand.

Including the world’s two most populous states, RCEP’s members generate some 31 per cent of world exports and its aggregate GDP is bigger than that of the TPP. Though less ambitious than the accord abandoned by President Trump, the RCEP could form the basis of a future free trade area of Asia and the western Pacific, but one with China, not the US, as the hub. Yet this will work only if China creates a vast open market for other countries.

China’s “One Belt, One Road” initiative, launched in 2013, might accelerate the emergence of such a market. Its aim is to use China’s capital and organisational abilities to enhance the supply of infrastructure throughout Eurasia and even beyond. If successful, this would accelerate economic integration, both by land and sea, within an economic system centred on China. The infrastructure needs of the Asia-Pacific region are so vast that additional Chinese resources should be helpful.

The world, and so Asia, is now in an unstable balance between globalisation and deglobalisation and between US and Chinese leadership.

The US is turning its back on its postwar role, once so vital to Asia’s economic success. Will what takes its place be chaos and confusion or a new order built around China? Optimists might consider this a time of opportunity. Pessimists can consider it a time of danger. It is in fact both.

Copyright The Financial Times Limited 2017

Please see also:

China encircles the world with One Belt, One Road strategy

Asean has invested ‘less than half’ of what it will need

Finance will create new alliances across Asia

(DN) Martin Wolf: “Trump é instável e emocional. O mundo tornou-se imensamente imprevisível”


Martin Wolf 

Entrevista a Martin Wolf, economista, jornalista e escritor. Comentador principal no Financial Times

Na ressaca das eleições norte-americanas, a referência do jornalismo económico mundial veio a Lisboa para a conferência Luzes e Sombras da União Europeia. Desassombrado, disse que a zona euro é uma máquina de produzir divergência, e que nada o leva a apostar no futuro da União Europeia.

Na conferência disse que a democracia não era imune à estupidez. Qual poderá ser o impacto global da vitória de Trump?

Ainda é demasiado cedo para sabermos, porque não sabemos ao certo o que ele vai fazer. Acho que é, potencialmente, um evento que vai transformar o mundo. Mas, vamos analisar os vários componentes… primeiro, o senhor Trump já afirmou claramente que não está empenhado nos princípios básicos da política americana do pós-guerra: não está empenhado na globalização, longe disso, ele é um protecionista; não está empenhado nas alianças estratégicas dos Estados Unidos, encara-as como meramente transacionais; está muito inclinado para o senhor Putin; e já indicou que a América não tem interesse em intervenções externas para promover a democracia, nada disso. É um abandono das posições fundamentais dos Estados Unidos. Segundo… ele mostrou estar empenhado numa política orçamental muito expansionista, que provavelmente será acompanhado por políticas monetárias mais restritivas. Isto pode levar a uma vasta valorização do dólar, a um grande aumento do défice externo. Vai funcionar como um incentivo temporário para a economia mundial, mas vai reforçar a pressão protecionista. E torna a via do protecionismo muito mais provável. Foi o que aconteceu no início dos anos 1980, no início da era Reagan. Mas, nessa altura eles avançaram para o Uruguay Round (oitava ronda negocial do acordo GATT, que levou ao nascimento da Organização do Comércio Mundial), e isso não vai acontecer com Trump. Por isso, acho que esta combinação vai acelerar o movimento da América rumo ao protecionismo. Acho que isso é potencialmente devastador, sobretudo nas relações com a China, porque a proteção contra a China pode desencadear verdadeiras guerras comerciais. Este é o segundo ponto, desestabilização macroeconómica e da política comercial. Em terceiro, obviamente, as políticas domésticas. Trump vai adotar políticas que vão provocar enormes convulsões sociais, à volta de questões como o aborto, por exemplo. Por isso, vamos ter uma amarga guerra cultural nos Estados Unidos. O senhor Trump já revelou muito pouco apego ao estado de direito, e vai escolher juízes para o Supremo Tribunal que o apoiem.

Referiu-se a Donald Trump, enquanto candidato, como defendendo uma forma diluída de fascismo. Como presidente, é de esperar esse rumo?

Sim. Acho que são esses os seus instintos, e acho que vão ser muito prejudiciais para os Estados Unidos. Mas, mais importante, vão sobretudo subverter o modelo americano. Em última análise, a sua eleição está a legitimar os autocratas por todo o mundo, que podem dizer “se eles o estão a fazer na América, porque é que nós não podemos fazer?” Para alguém como Putin ou Erdogan, esse tipo de política, se quisermos de ditadura plebiscitária, vai tornar-se mais legítima. Esta é a quarta enorme consequência – transformação interna e internacional. Por último, e em quinto lugar, o senhor Trump é claramente um indivíduo instável, emocional, hipersensível à crítica, e grotescamente mal informado – duvido que alguma vez tenha lido o que quer que seja -, o que quer dizer que o mundo acaba de se tornar imensamente imprevisível. Ele é o absoluto oposto do atual presidente, que sempre foi racional, calmo, focado, bem informado, que lê e escreve maravilhosamente bem – é um grande orador. Ou seja, os americanos escolheram um anti-Obama. Acredito que vão arrepender-se, mas acho que nós ainda vamos acabar por lamentar mais esta eleição do que os americanos.

Identificou uma coligação entre o eleitorado tradicional do partido conservador e o voto das classes operárias, por hábito mais próximas do partido trabalhista, como uma das explicações para a vitória do leave no referendo ao Brexit. Acha que estivemos perante uma coligação semelhante nos Estados Unidos?

Sim, é a mesma coligação. Claramente, os republicanos formaram uma coligação entre vencedores da economia, pessoas prósperas e bem-sucedidas, que não querem pagar impostos e veem o Estado como ineficaz – os republicanos tradicionais, pessoas que são culturalmente conservadoras -, e os brancos das classes médias e operárias, que sentem que o seu rendimento não está a aumentar, que o governo não está a fazer nada para as ajudar, que os negros e hispânicos estão a tomar os seus postos de trabalho, que as mudanças culturais desvalorizam os seus valores, e que, no fundo, querem reinstaurar o status quo. Isto não é nada de novo, isto é o tipo de coligação que, até certo ponto, sempre esteve presente nos movimentos fascistas. Mas, há uma diferença. Nos Estados Unidos e no Reino Unido existe um sentimento profundo de liberalismo económico, uma crença no mercado e no comércio livre, que não está presente em Trump, mas está muito presente no partido Republicano. Uma das dimensões deste movimento fascista, entre aspas, é na verdade o liberalismo económico e o comércio livre. Isso vai criar uma tensão entre o Presidente e o Congresso dominado pelo partido Republicano. Essa é de facto a coligação que venceu estas eleições. Uma combinação de pessoas de classe média, de trabalhadores amedrontados com o presente, e de pessoas bem-sucedidas que têm vastos interesses económicos que querem proteger.

Acha que há uma boa margem para desilusão dos dois lados do atlântico, entre os eleitores do leave e os eleitores de Donald Trump?

Sim, para mim é uma certeza…

…no curto prazo?

Bem, as coisas nunca mudam tão depressa. No caso do Brexit é diferente porque não esperamos que nada aconteça no curto prazo. No caso do Trump, ele poderá dar-lhes cortes nos impostos, e vai conseguir uni-los à volta de ataques contra pessoas de quem eles não gostam. Em suma, ele pode dar-lhes algumas coisas, mas não vai conseguir alterar a sua situação económica, porque não pode.

Acha que estes dois casos – Brexit e eleição de Trump – demonstram que as democracias ocidentais não estavam preparadas para lidar com a globalização?

Essa é uma questão muito, muito profunda. No fundo, são duas questões. No livro que escrevi sobre globalização há 12 anos, defendi firmemente que era perfeitamente possível conciliar a globalização com um estado social forte, mas nessa altura eu não estava a contar com uma crise financeira com a escala que tivemos, o que é muito importante…

…Ninguém a antecipou.

Bem, alguns conseguiram prever, mas em 2012 não eram muitos. Eu estava preocupado com o mercado financeiro, mas não com uma crise àquela escala. Acho que nos Estados Unidos boa parte da rede de segurança tinha desaparecido, no Reino Unido isso não aconteceu, mas na América o estado social tinha colapsado. Isso tornou as pessoas ansiosas, mas não as levou a pedir mais ajuda do Estado porque, nos Estados Unidos, veem isso como uma humilhação. A segunda coisa foi muito maior do que imaginava, e isso é relevante. Quando fiz o meu trabalho não previ que o impacto da China na indústria fosse tão rápido quanto foi. Acho que é importante perceber que a globalização que acabámos de atravessar – e essa é uma das ironias, esta fase está a terminar – não tem precedentes na história. Para responder à sua pergunta, não foi a globalização que alterou tudo, foi a globalização com a China. E a capacidade da China para aumentar as suas exportações de manufatura, para absorver tecnologia e começar a produzir, não só em produtos de baixa qualidade, mas ao longo de toda a cadeia de produção, tudo num período de dez anos, era em boa parte imprevisível para todo o mundo. Talvez tenha sido ingenuidade nossa, porque eles, afinal, só provaram que eram capazes de ser …chineses. Provaram que são trabalhadores, disciplinados e capazes como foram ao longo da história. Num período de dez anos, mudaram realmente boa parte da indústria mundial. Alguns países sobreviveram bem, como a Alemanha, porque produzem coisas que são incrivelmente difíceis de fazer – é essa a base do sucesso da indústria alemã. E na verdade, no Reino Unido não perdemos manufatura, porque já não tínhamos muita, e o nosso setor financeiro está ótimo, os chineses não são concorrência na alta finança ou nos serviços em geral. Por isso, a economia do Reino Unido não foi muito afetada pela globalização. Mas, os Estados Unidos foram. As velhas fábricas industriais foram destruídas, e isso provocou grandes choques. O mesmo é verdade para o sul da Europa e para outros países. Acho que devíamos ter previsto isto melhor, e devia ter havido mecanismos de proteção para a transição entre modelos. Mas, mantenho a opinião de que o principal fator que levou à perda de empregos não foi o comércio internacional, mas antes a tecnologia. Tem havido impressionantes avanços na produtividade industrial, mesmo impressionantes, é o único setor em que continua a haver avanços nessa área, com a robotização, por exemplo. Há 40 anos, 30 ou 40% da força de trabalho nos Estados Unidos e na Inglaterra estava na indústria, hoje é 10%. E os défices comerciais não explicam toda esta evolução, e vai acabar por chegar aos 2%. A indústria está a fazer o caminho da agricultura. Os políticos andam a prometer o regresso dos empregos na indústria, e isso não vai acontecer, a tecnologia não vai deixar, não é possível voltar atrás. Por isso, temos de avançar. Isto não se trata de um problema da globalização, trata-se de ser honesto com as pessoas, de prepará-las para o futuro e de criar economias que lhes garantam rendimento.

Acha que podemos ter novos choques, com uma nova vaga de robotização e com o recurso cada vez maior a sistemas de inteligência artificial? Acha que podemos estar a potenciar as forças que entraram em jogo no Brexit e na eleição de Donald Trump?

Acho que, no essencial, o choque provocado pelo comércio internacional acabou. As exportações chinesas pararam de crescer, e ninguém pode bater a China, é um caso único, a outra grande economia é a Índia, mas a Índia não vai ter o mesmo percurso da China. O que vai acontecer é que as exportações de outros países em desenvolvimento vão substituir os produtos chineses, e a China poderá entrar em mercados como o automóvel, mas produzindo-os aqui, na Europa. Por isso, o choque do comércio está a terminar, e agora devíamos estar a preocupar-nos, como dizia, para o choque tecnológico. Acho que nos principais países industrializados – e isto só não é verdade para a Alemanha e para o Japão -, a indústria já representa apenas uma pequena parte do emprego total, logo, vamos perder mais empregos, mas o principal impacto já aconteceu. Podemos perder mais uns 6 ou 7% nos próximos dez anos, é importante, mas o choque principal já passou. Agora, a questão coloca-se nos serviços. É claro que a tecnologia, de uma forma geral não só a robótica, vai levar a uma redução de empregos nos serviços. Mas, ainda não sabemos ao certo qual vai ser o resultado. Há pessoas no topo com funções muito, muito específicas e diferenciadas, que vão sobreviver e ter ajuda de “máquinas” com inteligência artificial. Depois há tarefas que não podemos entregar a máquinas, como todos os trabalhos que impliquem cuidar de outras pessoas, e essa é uma fatia muito importante do mercado de trabalho. Depois há outras tarefas, como conduzir um carro. Não sei, mas daqui a uns 20 ou 25 anos, não devemos ter ninguém a conduzir um táxi ou um camião. Não será uma mudança tão radical como quando nos livrámos de todas as pessoas envolvidas com os cavalos, mas haverá enormes mudanças económicas. Agora, o problema é que não tenho dúvidas de que vamos encontrar trabalhos, somos razoavelmente bons a encontrar e inventar trabalhos, mas a questão é o nível de rendimento que estará associado a esses trabalhos. O que me parece óbvio é que estamos a regressar a uma economia típica do século XIX, com imensa riqueza concentrada num número reduzido de mãos, e isso parece-me ser altamente indesejável. Por isso, tendo a pensar que temos dois grandes desafios – a distribuição da riqueza, quem possui os bens, e o sentido da vida. Muito do sentido que as pessoas dão à vida vem do trabalho, de desempenharem uma função profissional que é vista como útil e válida. Isso nem sempre foi assim, os aristocratas sentiam orgulho em nunca terem trabalhado, mas esta é a nossa sociedade. Será que vamos conseguir dar sentido à vida das pessoas sem que elas sintam o trabalho como sendo a parte central do que são e do que fazem? Talvez sim ou talvez não. A verdade é que estamos agora a entrar numa época de incerteza económica, social e política, e não estamos a lidar bem com isso. A maior parte das questões não têm respostas óbvias, e num certo sentido isto é tudo um subproduto do nosso sucesso; porque somos tão incrivelmente inventivos, somos tão bons a inventar coisas novas, que acabamos por minar tudo o que dávamos por garantido, todas as nossas velhas certezas.

Temos eleições na Alemanha, na França, um referendo em Itália. Devemos preparar-nos para mais surpresas?

Bem, os meus amigos dizem-me que o Renzi vai perder o referendo em Itália, e nesse caso demite-se. Acho que a Itália está em muito mau estado. Se me perguntarem qual o país com maior probabilidade de sair da Zona Euro, eu diria que é a Itália.

…Problemas com a dívida?

Problemas com a dívida, problemas económicos, a Itália está em queda permanente. Bem, Portugal está num estado semelhante… aliás, Portugal e Itália são os dois países mais parecidos, no sentido em que Portugal nunca beneficiou de um boom. A Espanha e a Irlanda tiveram um boom, a Grécia teve um boom, mas vocês não, o vosso boom aconteceu nos anos 1990. Portugal, na minha opinião, está em recessão ou estagnação há quase vinte anos, e a Itália também está nesse estado há quase vinte anos. As pessoas estão desiludidas, os jovens estão desiludidos, e os jovens mais brilhantes estão a sair do país. A questão é se a Itália “é estável?”, o argumento a favor é que é um país muito antigo, a população está em declínio, a taxa de natalidade é muito baixa, e como é um país envelhecido e os velhos não são revolucionários, nada vai acontecer. O argumento contra é que estão muito, mas mesmo muito fartos. Por isso, eu acho que a Itália está instável. Quanto à França, eu acho que a vitória de Trump… os meus amigos dizem-me que isso seria impossível, não sei, França é um país difícil de entender, mas se olharmos para a história francesa, o país pode estar muitos anos a acumular tensões e depois explodir. É uma estabilidade pontuada pela revolução, precisamente ao contrário do Reino Unido, nós fazemos tudo com muita calma, não temos uma guerra civil decente há mais de 400 anos (risos). Eu acho que a Marine Le Pen pode ser Presidente. Se a discussão for entre Marine e Juppé, ela pode ganhar. Hollande não tem hipóteses. E se for contra Sarkosy, também pode ganhar. Há muitos eleitores de esquerda que têm muita simpatia – é um pouco como no Brexit -, há muitos operários de esquerda que são a favor do protecionismo, são nacionalistas, não gostam do comércio livre, são desconfiados em relação à globalização. O Juppé é liberal muito inteligente, mas não é carismático e a Marine, que é politicamente muito mais hábil e arguta do que o pai, está a construir uma espécie de política “trumpista” que apela às classes operárias. Parece-me que ela pode ganhar. E, se ela ganhar, como é que vai funcionar o diálogo político com a Alemanha de Angela Merkel? A Angela Merkel, que muito admiro apesar de ter feito muita asneira na forma como lidou com a crise da Zona Euro, está firmemente agarrada à tradição alemã pós-fascismo. Uma das coisas mais espantosas no mundo, e é realmente espantoso, é que a mais estável das democracias ocidentais é a Alemanha. E porquê? Porque já passaram por isto. Estiveram lá, fizeram isso, e trouxeram uma t-shirt, como costumamos dizer… Eles sabem, no seu íntimo, ao que é que leva o fascismo, e de uma forma que nós não conseguimos imaginar. Com Angela Merkel – que eu acho que vai ganhar porque não há alternativa – e com a Marine Le Pen, como é que podemos gerir a União Europeia? São duas pessoas que, emocional e fundamentalmente, discordam em toda a linha. Acho que vai tornar a União Europeia completamente disfuncional. Espero estar enganado, porque sou um idoso que precisa de estabilidade, e acredito que o mundo que tínhamos não era lá muito mau, mas acho que não estamos de forma alguma perto do fim deste ciclo de desilusão e reação nas nossas democracias. E não vejo, literalmente, qualquer político convencional, com opiniões e visões convencionais, à altura dos acontecimentos. Nenhum, desde Obama.

E a esquerda social-democrata na Europa?

Parece que está morta, não é? Não sei… (longa pausa) talvez esteja enganado, mas acho que os social-democratas têm de se mover para a esquerda. Têm de tentar “vender” mais impostos, mais redistribuição, maiores défices orçamentais (nova pausa), e algumas políticas realmente radicais no que respeita à distribuição da riqueza. Contudo, precisam de fazer isto – e esse é o seu grande desafio – dentro do atual contexto de cooperação europeia. Não sei se vão conseguir essa combinação, e se vão conseguir tornar essas propostas credíveis aos olhos dos eleitores, porque os eleitores vão olhar para essas promessas e pensar que eles nunca as vão cumprir, porque o capital vai fugir, etc. Se eles continuarem onde estão, acompanhando no essencial a agenda do centro-direita e não oferecendo nada de diferente, então as pessoas vão dizer “se é para ter políticas de centro-direita, porque não escolher políticos de centro-direita que, de facto, acreditam nelas?” Renzi é o último líder social-democrata credível em todo o continente. Se ele falhar, tal como Hollande e Gordon Brown falharam, então podemos declarar a morte da social-democracia nos grandes países europeus – sobra a Alemanha, onde a social-democracia não está morta, mas está a morrer. Por isso, se eles não adotarem um discurso diferente, propostas diferentes, que não sejam loucuras… não acho que os eleitores europeus vão regressar ao socialismo puro, não acho que vão votar em alguém como Jeremy Corbyn, não acho que o comunismo em qualquer das suas formas seja “vendável” ao eleitor europeu, por isso tem de ser uma social-democracia revista, mas sempre dentro da tradição democrática. Se não fizerem isso, vão morrer.

O que está a propor é combater o radicalismo de direita com armas iguais, com um conjunto de ideias igualmente radicais, mas de esquerda?

Sim, certamente com mais radicalismo do que o que estão dispostos a arriscar atualmente. Acho que – e a minha análise política não é tão boa como a análise económica -, goste-se ou não, e eu não gosto, a posição que o centro tinha, de que podemos combinar um mercado mais ou menos livre com estabilidade económica, prosperidade, uma redistribuição de riqueza moderada, e uma contínua melhoria das condições de vida, essa visão centrista colapsou. E colapsou, no essencial, devido à crise financeira e à impossibilidade de criar níveis adequados de emprego. Colapsou de formas diferentes em diversos países, em Portugal devido ao desemprego e a uma recessão de vinte anos. Mas Portugal e a Itália têm problemas estruturais na economia que ninguém consegue resolver facilmente. Dizia que, a posição que marcava o centro desapareceu, o que quer dizer que vamos ouvir vozes cada vez mais radicalizadas. A extrema-direita, como já discutimos, é uma estranha mistura de mercado livre e nativismo/protecionismo. Por isso, a esquerda mais radical tem de ter uma resposta credível. E parece-me que terá de ser um pouco como a social-democracia que emergiu nos anos 1930 – o partido trabalhista de meados do século XX sem os sindicatos, porque o movimento sindical desapareceu.

…Um Estado mais forte?

Sim, um Estado mais forte, políticas industriais mais ativas, mas dentro do tal quadro de cooperação europeia. Devemos lembrar que o governo trabalhista no Reino Unido, que esteve na origem do Serviço Nacional de Saúde – e é muito difícil defender algo de semelhante agora -, foi o mesmo que esteve no nascimento da NATO. É o tipo de combinação… têm de dizer coisas como “vamos taxar as empresas”, “vamos taxar os ricos, vamos garantir que eles também pagam impostos”, “vamos tornar as nossas sociedades mais justas”, “vamos apoiar os operários”, “vamos reduzir as desigualdades nos rendimentos”, “vamos forçar as empresas a ser mais responsáveis”. É por aí que a esquerda tem de ir. E os políticos têm de ser mais combativos, porque o velho centro desintegrou-se. Só se mantém na Alemanha, porque a Alemanha está a ter enorme sucesso. É o único país desenvolvido em que o PIB per capita cresceu mais de 10% desde a crise, não há mais nenhum, mesmo nos Estados Unidos só subiu 4%. O rendimento disponível nos EUA e no Reino Unido, para a maioria das pessoas, não é maior agora do que era em 2007, e nós saímos muito melhor da crise do que outros países, mas as pessoas não sentem que estão a partilhar dessa prosperidade, logo a política torna-se mais radical, é inevitável. E tenho de dizer que temo muito mais a extrema-direita do que a extrema-esquerda. Pelo menos a extrema-esquerda moderna, se fossem comunistas, pensaria de outra forma, mas a direita radical, com as suas posições sociais reacionárias, com a xenofobia, com o protecionismo extremo, é muito assustadora. Para mim, soa demasiado aos anos 1930 e não gosto disso. E suponho que em Portugal também devem saber como é a extrema-direita porque a tiveram durante muito tempo, durante 48 anos. No caso de Portugal, e eu estive aqui pela primeira vez, devo dizer que apesar de tudo o país fez imensos progressos. É um país diferente, e têm muito a perder. Consigo entender perfeitamente porque é que querem tanto continuar a pertencer à União Europeia.

Disse a União Europeia é uma máquina de produzir divergência. Como é que se para a máquina?

Acho que como as coisas estão neste momento, com a estrutura que existe, não é possível. O único país que atravessou a crise com algum sucesso foi a Irlanda, mas é uma pequena economia com características absolutamente únicas. Como as coisas estão agora, com os enormes excedentes da Alemanha, e a enorme vantagem competitiva da indústria alemã, não vejo qualquer caminho alternativo plausível para os outros países. Mas, devo dizer, o BCE fez um trabalho muito melhor que eu esperava na gestão da política monetária, e tem sido de facto o único fator de recuperação na Zona Euro. Mario Draghi fez um trabalho espantoso, mas não é suficiente, não há mais nada. Não vai haver acordo orçamental, não vai haver um aumento no orçamento da União Europeia, não vai haver qualquer alteração nas relações de competitividade entre os estados. A Espanha tem algumas vantagens competitivas nos serviços e em áreas como a construção, e acho que talvez consigam superar este momento, estou ligeiramente otimista em relação à Espanha, mas estou muito pessimista em relação à Itália, e a Grécia, bem…, a Grécia é um caso perdido. Não vejo como a Grécia possa ser salva. A Grécia é uma tragédia, mas a Itália é muito mais importante, mais preocupante. E a França está presa na estagnação. Talvez se consiga reformar, tem o potencial para isso, mas vão ser dez ou vinte anos de trabalho árduo.

Disse na conferência que, no conjunto, não podemos assumir como um facto o futuro da União Europeia…

As pessoas exigem dos políticos respostas às suas preocupações. Se não houver respostas ao nível europeu, terá de haver ao nível nacional, e o mais provável, nesse caso, é que os políticos passem a candidatar-se ao poder com um discurso anti União Europeia. Vão dizer que “a UE falhou-nos, os políticos de Bruxelas falharam-nos, as políticas da UE falharam, temos de nos libertar”. É isto que Marine Le Pen diz, no essencial é isto que ela diz, ela está a candidatar-se contra a União Europeia. Acho que o próximo primeiro-ministro italiano vai ser alguém com este discurso. Depois, o que é que acontece quando um destes políticos chega ao poder? Podem ceder, como o Tsipras, porque a Grécia é muito dependente da União, mas num país grande como a França ou a Itália é mais difícil que os políticos consigam quebrar essas promessas de campanha. Então, podem pura e simplesmente sair da União. É um desastre, e uma vez iniciado esse processo, seja onde for, basta um país e a credibilidade de todo o processo é esmagada. O Brexit é um caso especial, apesar de ter atingido a credibilidade da UE, o facto é que o Reino Unido nunca esteve completamente dentro da União, tinha uma “relação especial” com a UE. É um caso único. Se outro país importante fizer o mesmo, o projeto europeu passa a parecer reversível, e quando começa a parecer reversível, é o fim. Por outro lado, se isso passar a ser uma ameaça séria, talvez a Alemanha comece a fazer as mudanças que é preciso fazer. Talvez seja uma forma de reformar a União Europeia. Eu não arriscaria um calendário, mas acho que nos próximos dez anos, talvez menos, ou vai ou racha. Isto não me parece nada estável. Espero estar enganado, espero mesmo estar enganado. Acho que com todos os seus erros, e não são poucos, incluindo a criação do Euro, a Europa tem sido uma fonte fantástica de estabilidade, democracia e progresso no continente europeu, mas atualmente parece-me demasiado frágil.

Mas, como é que se diz ao povo alemão que não podem ter uma economia com tamanhos excedentes. É contranatura…

Tem de ser dizer “aumentem os salários reais”, “gozem a vida!”, tornem-se mais prósperos… Bem, a resposta tem de ser uma de duas: ou ajustam a sua competitividade ou financiam os défices. Não há alternativa, porque conseguir que todos os outros deflacionem, numa zona que tem um nível inadequado de procura é impossível. O problema é que no ponto em que estamos neste momento, a Alemanha nem sequer reconhece que é esse o seu principal desafio, por isso, como é que se discute isto? Isto é uma visão demasiado pessimista. Acho que o que a Alemanha fez no pós-guerra é fantástico, quer ao nível político, quer ao nível económico. A economia alemã é, em muitos aspetos, absolutamente extraordinário. Mas, acho que eles já demonstraram que não conseguem ser um líder hegemónico bem-sucedido da Europa, porque olham demasiado para o seu próprio umbigo. Eles não fizeram o mesmo que os americanos depois da guerra, para que a economia mundial funcionasse. O líder hegemónico, como dizia o grande Charles Kindleberger, tem alguns deveres e um desses deveres é o de promover um mercado, e eles não o conseguem fazer. Sendo esse o caso, não estou a ver como é que eles vão conseguir por a Europa a funcionar.

(Irish Times) Martin Wolf: Trump’s answer is ‘clear, simple and wrong’

(Irish Times) Stagnating incomes will not be solved by a dose of populist protectionism

Signs supporting Republican presidential candidate Donald Trump are held during the Republican National Convention in Cleveland, Ohio. Photograph: Timothy A Clary/AFP/Getty ImagesSigns supporting Republican presidential candidate Donald Trump are held during the Republican National Convention in Cleveland, Ohio. Photograph: Timothy A Clary/AFP/Getty Images

“For every complex problem, there is an answer that is clear, simple and wrong.” HL Mencken could have been thinking of today’s politics.

The western world undoubtedly confronts complex problems, notably, the dissatisfaction of so many citizens. Equally, aspirants to power, such asDonald Trump in the US and Marine Le Pen in France, offer clear, simple and wrong solutions – notably, nationalism, nativism and protectionism.

The remedies they offer are bogus. But the illnesses are real. If governing elites continue to fail to offer convincing cures, they might soon be swept away and, with them, the effort to marry democratic self-government with an open and co-operative world order.

What is the explanation for this backlash? A large part of the answer must be economic. Rising prosperity is a good in itself. But it also creates the possibility of positive-sum politics. This underpins democracy because it is then feasible for everybody to become better off at the same time. Rising prosperity reconciles people to economic and social disruption. Its absence foments rage.

Poorer than their parents?

The McKinsey Global Institute sheds powerful light on what has been happening in a report entitled, tellingly, Poorer than their Parents?, which demonstrates how many households have been suffering from stagnant or falling real incomes.

On average, between 65 and 70 per cent of households in 25 high-income economies experienced this between 2005 and 2014.

In the period between 1993 and 2005, however, only 2 per cent of households suffered stagnant or declining real incomes.

This applies to market income. Because of fiscal redistribution, the proportion suffering from stagnant real disposable incomes was between 20 and 25 per cent.

McKinsey has examined personal satisfaction through a survey of 6,000 French, British and Americans. The consultants found that satisfaction depended more on whether people were advancing relative to others like them in the past than whether they were improving relative to those better off than themselves today.

Thus people preferred becoming better off, even if they were not catching up with contemporaries better off still. Stagnant incomes bother people more than rising inequality.

The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery. These experiences have destroyed popular confidence in the competence and probity of business, administrative and political elites.

But other shifts have also been adverse. Among these are ageing (particularly important in Italy) and declining shares of wages in national income (particularly important in the US, UK and Netherlands).

Real income stagnation over a far longer period than any since the second World War is a fundamental political fact. But it cannot be the only driver of discontent. For many of those in the middle of the income distribution, cultural changes also appear threatening.

So, too, does immigration — globalisation made flesh. Citizenship of their nations is the most valuable asset owned by most people in wealthy countries. They will resent sharing this with outsiders. Britain’s vote to leave the EU was a warning.


So what is to be done?

If Mr Trump were to become president of the US, it might already be too late. But suppose that this does not happen or, if it does, that the result is not as dire as I fear. What then might be done?

First, understand that we depend on one another for our prosperity. It is essential to balance assertions of sovereignty with the requirements of global co-operation. Global governance, while essential, must be oriented towards doing things countries cannot do for themselves. It must focus on providing the essential global public goods. Today this means climate change is a higher priority than further opening of world trade or capital flows.

Second, reform capitalism. The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives. The interests of shareholders are given excessive weight over those of other stakeholders in corporations.

Third, focus international co-operation where it will help governments achieve significant domestic objectives. Perhaps the most important is taxation. Wealth owners, who depend on the security created by legitimate democracies, should not escape taxation.

Accelerate growth

Fourth, accelerate economic growth and improve opportunities. Part of the answer is stronger support for aggregate demand, particularly in the euro zone. But it is also essential to promote investment and innovation. It may be impossible to transform economic prospects. But higher minimum wages and generous tax credits for working people are effective tools for raising incomes at the bottom of the distribution.

Fifth, fight the quacks. It is impossible to resist pressure to control flows of unskilled workers into advanced economies. But this will not transform wages. Equally, protection against imports is costly and will also fail to raise the share of manufacturing in employment significantly.

True, that share is far higher in Germany than in the US or UK. But Germany runs a huge trade surplus and has a strong comparative advantage in manufactures. This is not a generalisable state of affairs.

Above all, recognise the challenge. Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order.

The candidacy of Mr Trump is a result. Those who reject the chauvinist response must come forward with imaginative and ambitious ideas aimed at re-establishing that balance. It is not going to be easy. But failure must not be accepted. Our civilisation itself is at stake.

+++ (FT) Lunch with the FT: Adair Turner

(FT) Over sea bass and ravioli, the former head of the FSA talks about Brexit, his mistake with the euro and why George Osborne is ‘a bit of a gambler’.

Lunch with the FT illustration of Adair Turner by James Ferguson
© James Ferguson

I arrive at Cecconi’s on time, just after 1pm, to find my guest is already seated, drinking a Virgin Mary. It is a fitting venue. Cecconi’s, in the heart of Mayfair, is a celebrated meeting house for barons of finance and politics, the two worlds in which my guest’s career has evolved.Jonathan Adair Turner, or Baron Turner of Ecchinswell to give him his title, is the UK’s technocrat for all seasons, a British version of a Frenchénarque. He embodies the international economic and policymaking elite — at a time when many Brexiters and Donald Trump supporters see this as the ultimate term of abuse.

Even before ordering, we have to touch on the Brexit campaign. At the time of our lunch, polls still put the Remain camp in the lead. Michael Gove, one of the more articulate advocates of Brexit, has just been lampooned for citing Albania as a model for a possible looser relationship with the EU. “Gove must be kicking himself for having mentioned Albania” Turner says and agrees with me that, at this moment, the Leave campaign “seems not to be in good shape”. But, he rightly adds: “You can’t assume that will last.”

We catch the eye of a waiter. Turner chooses a watercress salad, followed by sea bass. I choose quail eggs and crab ravioli. Neither of us drinks wine at lunch. Turner, who is 60, has been a banker, a director of the McKinsey management consultancy, director-general of the Confederation of British Industry and head of the Financial Services Authority, the now-disbanded financial regulator. I suggest that leading the CBI, which he did between 1995 and 1999, was one of the world’s worst jobs. “The CBI, when I took it over, was in danger of going bankrupt,” he says. “It employed 300 people, but only needed 200. So I worked out how to run the thing with 225 people, increased pay, invested in IT, renegotiated the lease, and persuaded the top 50 members to pay five years of subscriptions in advance.”

He adds: “I was terrified that the Telegraph, which was sniping at the CBI for being too pro-European, would find out that we were also struggling financially and would write articles about it before I solved the difficulty.”

“Incompetent CBI going bankrupt” stories? “Yes, not only pro-European, but incompetent.”

In 2000, a year after he stepped down from the CBI, Turner became a vice-chairman at Merrill Lynch, which, like the rest of Wall Street, was then enjoying boom times. “To be blunt, these extraordinary roles at investment banks are entirely ambassadorial: they pay ludicrous amounts of money for opening doors,” he says. It was around this time that he started to become engaged in public policy, ending up as chairman of the Low Pay and Pensions commissions that advise the Labour government.

So what does he think of the current chancellor George Osborne’s decision to introduce a higher “living wage”?

“There is some opportunity to increase the level of the minimum wage,” Turner says. “But I would be cautious. The answer to inequality at the low-wage end has to be a combination of the minimum wage and in-work benefits. Also, I disagreed with the process … ”

Osborne could have asked the Low Pay Commission to consider this option, I argue. “Yes, precisely.” The chancellor, he agrees, is “very high-handed. And he likes gambling. I was amazed to learn that his uncle [the late John Aspinall] used to run Aspinall — the casino. I’ve often said George was a bit of a gambler but I didn’t literally mean it.”

By now, we are eating our second courses. What, I ask, are the most important ways in which his views have changed? He starts with his earlier support for the euro. “In terms of economics I went through a move in one direction that went far too far. That led me into making the biggest mistake that I’ve made, which was supporting joining the euro. Then I moved back.”

He goes back further, to the mid-1970s, when he obtained a double first in history and economics at Cambridge. “I was undoubtedly a Keynesian. I thought his General Theory of Employment (1936) was fascinating. I was also wrong then on some things. I believed in prices and incomes policies and I now think those simply don’t work. And I went through a sort of drying-out process in the early 1980s.” He became convinced, he explains, that macroeconomic stability could be secured by rigid rules and “so what matters is supply-side efficiency. The euro was going to make it easier for people to invest without exchange-rate risk and so would produce a higher level of allocative efficiency [when production reflects the preferences of consumers]. That was clearly wrong.

“Actually, I changed my view on that much faster than people may have realised. In 2003 I wrote an article asking, ‘What happens inside the eurozone if we have a banking and deflation crisis?’ Then the financial crisis drove me back to thinking about the macroeconomics of money and debt and, in the process of doing that and also researching my book [Between Debt and the Devil (2015)] I found myself returning to things that I had thought about 40 years ago.

“I’d never believed in the efficient market hypothesis or the rational expectation hypothesis. But I’d forgotten that banks create credit, money and purchasing power and that they can create too much. But once you return to the fundamentals, you realise that it’s very dangerous to construct a currency union that doesn’t have enough of a political union to make it work.”

Should they dismantle the eurozone?

“Break-up would create major disruption,” he replies. “I still hope it will stay together and go down the required federalisation route. But, if it doesn’t, then maybe it should break up.”

How far, I wonder, should the euro disaster be part of the Brexit debate?

“I don’t think it should,” he says, “because we are not in the euro. What I do think is that, as long as we stay in the European Union, we need to be much clearer than we were in the past that there are at least two layers to Europe.

“In the past, there was a deep schizophrenia in British politics about Europe; not wanting to be part of a federalist project, but almost trying to stop them. But there was a crucial speech by George Osborne three years ago that said: the eurozone must federalise, we’re very happy for you to do that.”

I turn to migration. He shares my view that it is problematic if unlimited. “If immigration were the only issue, I could be a Brexiter,” he says. “The British population is forecast to go up from 63m to 74m by 2040. If you ask people what is the biggest determinant of their standard of living, often it is the length of their commute. Some people say, ‘Oh, we’ll just build on the greenbelt.’ But people love the greenbelt. I think large-scale immigration of people who are willing to work in unskilled jobs also probably reduces the wage rate of the people who are there already. And you can’t control your borders, unless you’re out.”

Nevertheless, he concludes, “I think the economics, apart from immigration, are clearly for staying in. I think there’s a political case that, however frustrating it can sometimes be, we should be part of a Europe attempting to get to joint points of view on the environment, and so forth.”

Turner inherited an interest in politics from his father, a Labour supporter who during the second world war was a conscientious objector. “He just had a logical argument, which he showed me. It was a statement of pacifism. He maintained that from 1939 to 1941. He then said, ‘Look, I’ve changed my mind. Will you now conscript me?’ And they said, ‘Well, we can’t because you’ve got an unconditional discharge.’ So he then volunteered and was in the navy for the last four years of the war. The way he used to put it, jokingly, is that by 1941 he was beginning to get worried Hitler might win.”

At Cambridge, Turner was president of the Union, chairman of the Conservative Association and a member of the Tory Reform Group, the “wet” end of Toryism. “I was a Tory because I was an anti-socialist.” This was between 1974-78, just before Margaret Thatcher won the first of her elections in 1979. “I felt that trade unions were too powerful. My views haven’t changed that much. I’m not a socialist, I don’t believe in a planned economy. I believe in a market economy, but I believe we need to do lots of things to make the market economy work, socially and environmentally.”

So does he now think trade unions are too weak? “Yes I do and actually I think that’s one of the ways my views have evolved. I’ve ended up believing that one of the things you do need for a balanced society is more balance in labour-market negotiations.”

Did he see himself, at university, as a future prime minister? “No,” he responds. “But I thought I might be in the group of people who were considered for that. But then, in 1981, I left the Conservative party and I joined the Social Democratic party. It wasn’t that Thatcherism was more hardline than I’d expected. It was that the SDP was where I’d probably have gone if it had existed four or five years before.”

He adds: “The way I decided I couldn’t be a politician was that, later in the 1980s, when there was the split between the Owenites [followers of David Owen] and the Ashdownites [followers of Paddy Ashdown], I made the mistake of going with David Owen into a space so pure that the entire party could agree with itself, but there were about 10 of us.”

I ask what really keeps him up at night. “One thing we don’t often talk about is population. If you look at the UN forecasts, from 2008 onwards, of the 2100 population of the world, it keeps on increasing. They had it down at around 9bn and it’s now up at around 11bn. The place where population growth has come down more slowly than anticipated is Africa. I’m very worried about Nigeria, which has gone up from a population of about 40m to 180m now. By the end of the century, it could be 600m.

“If you were to take Central and South America’s population growth over the past 50 years and ask what percentage of that increase moved to North America, and apply the same percentage to the forthcoming increase in the African population, you could believe there would be net immigration flows into Europe of three to five million a year, decade after decade. So I think that is a huge issue.”

I order a double espresso. Turner has a macchiato. He has just become chairman of the Energy Transitions Commission. Its aim, he explains, is to help deliver even greater reductions in emissions than agreed at last December’s climate conference in Paris, while ensuring emerging countries are still able to grow quickly. Has he been surprised by the stubborn persistence of climate scepticism? “Yes,” he replies. “They were hanging their hat on the supposed pause, which was always explicable by the fact that 1998 was an extraordinary peak. This then created an artificial pause. Any classical statistical technique shows that this is evolving pretty much as the climate models say it will.”

In the long run, the solution must be solar energy, he suggests. “But I don’t think there’s a silver bullet in the short term. You have to do lots of nitty-gritty things. Several billion people are going to move to cities over the next 50 years and whether they’re designed in dense high-rise with public transport systems running on clean electricity or American-style suburban sprawl, would make a huge difference.”

We turn to finance. Turner once described some of its activities as “socially useless”. As the person who took over at the FSA at the height of the financial disaster in September 2008, can he tell the public that we’re not going to have to live through another crisis like this?

“The likelihood of something very much like 2007-08 is appreciably diminished. The financial system itself is significantly more robust than it was then, essentially because we significantly increased the amount of capital. People sometimes fail to realise how big this is because we started with almost nothing.

“Was it enough? The answer is that, if I were the benevolent dictator of a greenfield economy and had to worry neither about agreeing with all my international counterparts nor about the transition from A to B, I’d set bank capital at about 20 to 25 per cent of the balance sheet. In my ideal world, banks would normally run with over 20 per cent equity … if they fall below 20 per cent, we intensify supervision; if they fall below 15 per cent, the government has the right to nationalise them without compensation.”

The eurozone worries me. It is a society of imperfectly integrated minorities, large migration flows, high unemployment and huge internal imbalances

Adair Turner

But macroeconomic stability still depends on creating more debt than we can easily handle. “Precisely,” he says. “We are in the absurd position where we have so much debt that we can only afford it by having interest rates at zero, which creates an incentive to create some more debt.”

Overall, he concludes, “the financial system is safer, with the exception of the Chinese financial situation”.

It is the next shoe to drop, I suggest. He agrees. “The counterargument is that at the moment most of it is within China, but the more they liberalise the capital account, the more that huge debt pile links to the rest of the world.”

So if he were tsar of the world economy, what would he want to do? “If one could do it on a co-ordinated basis, one should do a co-ordinated, simultaneous, money-financed fiscal stimulus. I would definitely do it in Japan.”

Ultimately, Japan, “one of the richest countries on earth”, doesn’t worry him too much. “Whereas the eurozone really does worry me because it is a society of large and imperfectly integrated ethnic, religious and cultural minorities, large and to a degree uncontrolled migration flows, still-too-high unemployment and huge internal imbalances.”

I stress my growing concern about the west’s political fragility. Will “the centre”, famously discussed in Yeats’ “The Second Coming”, hold, or will extremes again take over?

“I think the fragility of a liberal order is the other thing I’ve learned,” he responds. “I was once a confident optimist and rationalist. I also used to believe that everybody could be persuaded by rational argument. I’ve increasingly realised that people need mythologies, people need nationalisms and people need religions. How people get identities that provide emotional enrichment, without ending up with dangerous forms of extremism, is quite problematic.”

He asks me whether I have read Steven Pinker’s optimistic book on the decline of violence. I reply that we’re one big nuclear war away from this turning out to be completely wrong. “Absolutely,” he responds.

After this sobering end, I ask for the bill. While I am paying, Turner says he has to run. I pay and then run myself.

Martin Wolf is the FT’s chief economics commentatorzzaqasxcflhh

+++ V.V.I. (FT) The self-inflicted dangers of the EU referendum – Martin Wolf

(FT) What were they thinking? It is extraordinary to read a succession of official reports arguing, rightly, that a vote to leave the EU would impose long-term damage and a short-term shock. What sort of government would run such a risk, particularly when the economy has barely recovered from the financial crisis of less than a decade ago? The answer is one that has put the needs of short-term party management above its responsibility for the country’s welfare. David Cameron, prime minister, might soon be known as the man who left the UK in far-from-splendid isolation.

The Treasury has already argued that leaving the EU might lower real gross domestic product by between 3.4 and 9.5 per cent in the long term. This is broadly in line with estimates from other reputable forecasters. Patrick Minford of Cardiff University, a proponent of leaving, argues that the UK would enjoy a jump of 4 per cent in aggregate economic welfare after leaving the EU and adopting free trade (an unlikely choice). But this result is an outlier. It rests on implausible assumptions, not least on the impact of EU non-tariff barriers on domestic prices.

The Treasury has now followed up with a report on the short-term consequences of a vote to leave. In summarising the results, George Osborne, the chancellor of the exchequer, has stated that the UK would suffer a “do-it-yourself” recession if it decided to leave. One might better call it a “do-it-himself” recession. For it was the government’s decision to take this risk.

The new report’s main scenario predicts that GDP would be 3.6 per cent lower after two years than if the UK voted to remain, unemployment would be 520,000 higher and the pound would be 12 per cent lower. Under a worse scenario, GDP could be 6 per cent lower, unemployment 820,000 higher and sterling 15 per cent lower. The Institute for Fiscal Studies adds that, instead of an improvement of £8bn a year in the fiscal position, as the net contribution to the EU fell, the budget deficit might be between £20bn and £40bn higher in 2019-20 than otherwise, sharply slowing the planned fiscal consolidation.

Indeed, the Treasury argues, plausibly, that the very possibility of a vote to leave is already having an impact on the economy. But an actual vote to do so in June’s referendum would crystallise this risk and create significant and immediate effects, via three channels.

The first of these would be the tendency of households and businesses to adjust at once to becoming permanently poorer. This would lead to significant cuts in consumption and investment.

The second effect would come from prolonged uncertainty about how the UK’s relations with the EU would work out. It is difficult to exaggerate the scale of this uncertainty. After a vote to leave, the country would not know the complexion of its new government, the UK’s desired approach to renegotiation of its relations with the EU, or the response of the other members, let alone any final outcome. The uncertainty could also be long-lasting. Even the formation of a new government and agreement on its new approach might prove difficult. The likely leaders of a new government have also said things in this campaign that must hinder the chances of reaching an amicable settlement with EU partners.

The third effect would be the shift in financial conditions. Markets would at once reassess the UK’s economic prospects. Asset prices, including the exchange rate (as the Bank of England has already noted), are likely to adjust downwards immediately. An appreciable increase in the risk premia on UK assets could emerge. Asset price volatility would also increase. The BoE might face a difficult dilemma, since there is likely to be a simultaneous rise in expected inflation and a decline in expected output in the short term.

Official sources have described, in painful and quite plausible detail, how far the referendum unleashed by this government is a risky and dangerous gamble with the health of a fragile post-crisis economy. This is apart from the risks to the future cohesion of the UK and, quite possibly, of the EU, too.

This referendum is, arguably, the most irresponsible act by a British government in my lifetime. To the objection that this is to deny democracy, one can respond that the country was a successful democracy well before it embarked upon such referendums. Furthermore, the right time for a referendum would be when the UK is asked to accept further treaty changes or some other significant alteration in its position in the bloc. Right now one can only hope that the country does not soon learn what it means to divorce in haste and repent at leisure.sssdvvgnnjkoeerbhjm

+++ V.I. (FT) Failing elites are to blame for unleashing Donald Trump – Martin Wolf

(FT) A healthy republic requires a degree of mutual sympathy rather than equality.

Ferguson illustration

Donald Trump will be the Republican candidate for president. He might even become president of the US. It is hard to exaggerate the significance and danger of this development. The US was the bastion of democracy and freedom in the 20th century. If it elected Mr Trump, a man with fascistic attitudes to people and power, the world would be transformed.

Mr Trump is a misogynist, a racist and a xenophobe. He glories in his own ignorance and inconsistency. Truth is whatever he finds convenient. His policy ideas are ludicrous, where they are not horrifying. Yet his attitudes and ideas are less disturbing than his character: he is a narcissist, bully and spreader of conspiracy theories. It is frightening to consider how such a man would use the powers at the disposal of the president.

Andrew Sullivan, the conservative commentator, recently wrote: “In terms of our liberal democracy and constitutional order, Trump is an extinction-level event.” He is right.

It might prove surprisingly easy for President Trump to find people willing to execute tyrannical orders or to compel the unwilling to do so. By exaggerating crises or creating them, a would-be despot can pervert judicial and political systems. The presidents of Russia and Turkey are skilful exemplars. The US has an entrenched constitutional order. But even this might buckle, particularly if the president enjoyed impeachment-proof support in Congress.

Mr Sullivan calls on Plato, the greatest of anti-democratic philosophers, in aid. Plato, he reminds us, believed that the more equal a society became the less it would accept authority. In its place would come the demagogue who offers simple remedies for complex problems.

The presumptive Republican nominee is the pied piper of the enraged and the resentful

Mr Trump is the pied piper of the enraged and the resentful. He has risen, argues Mr Sullivan, as the man who will “take on the increasingly despised elites”. Moreover, the media revolution has facilitated this rise by erasing “almost any elite moderation or control of our democratic discourse”.

Demagoguery is indeed an Achilles heel of democracy. Yet the Athenian democracy, in which Plato lived, did not give way to a domestic tyranny but was rather born from one. It was the Macedonian king who ended it in 338BC.

Above all, Mr Sullivan understates the role of elites. In the case of the US, he argues that wealth is unable to buy the presidency. Mr Obama defeated Mr Romney, for example. But money buys influence at lower levels of politics. More important, elites shape the economy and society. If a swath of the people is enraged, elites bear responsibility.

The righteous attachment of the Democrats to the rights of women and, still more, the cause of minorities, defined by race, sexual orientation and identity, transferred the allegiance of the white, male middle classes, particularly in the old South, to the Republicans. The racial element in “Obama derangement syndrome” is quite clear.

Then Republicans treated these supporters to a “bait and switch”. They needed these votes for what their donors most desired: low taxes, weak regulation, free trade and liberal immigration. To make these causes goals of the Republican party, elites had to turn the government into the enemy. They also had to entice culturally conservative supporters with promises of change that were never likely to be met.

In addition, elites on both sides promoted economic changes that ended up destroying trust in their competence and probity. In this, the financial crisis and consequent bailouts were decisive.

Yet by then the middle classes had suffered decades of real income stagnation and relative income decline. Globalisation has brought huge benefits to many of the world’s poor. But there were significant domestic losers. Today, the latter believe that those who run the economy and polity impoverish, exploit and despise them.

Even Republican elites have become their enemy and Mr Trump has become their saviour. It is no surprise that he is a billionaire. Caesar, aristocratic leader of the popular party, brought forth “Caesarism”, the rule of the charismatic strongman that Mr Trump wants to be.

A healthy republic does not require equality, far from it. But it does require a degree of mutual sympathy. Sudden wealth from new activities — conquest in ancient Rome, banking in medieval Florence — can corrode social bonds. Ifcivic virtue vanishes, a republic becomes ripe for destruction.

Economic, social and political changes have brought the US to the point at which a significant part of the population seeks a strongman. It must be sobering to Republican elites that their base chose Mr Trump over Ted Cruz and Mr Cruz over everybody else. The party elite played populist games, notably in their adamant refusal to co-operate with the president. Those better at such games have defeated them.

Mr Trump realises that his supporters have no interest in the limited state beloved of conservatives. Their desire is rather the restoration of lost economic, racial and sexual status. His response is to promise massive tax cuts, sustained spending and reduced debt. But he does not need logical consistency. That is for the despised “lamestream media”.

Hillary Clinton is a weak candidate, tainted by her husband’s failings and her position in the establishment, and short on political talent. She ought to win but might not. But even if she were to win, that would not end this story.

Mr Trump has called forth new political possibilities. But it is not mainly an excess of democracy that has brought the US to this pass. It is far more the failings of short-sighted elites. Some of what has happened was right and so should not have been avoided. But much of it could have been. Elites, particularly Republican elites, stoked this fire. It will be hard to put out the blaze.ddkddfghjjuttyiuoo

+++ V.I. (FT) Martin Wolf: Britain after Brexit would sacrifice access for independence

(FT) Something important has emerged from the debate on the EU referendum in Britain: membership of the European Economic Area would be intolerable to most of those who want the UK to exit the EU. Those in favour of leaving are looking for options. But they confront a dilemma: the more power over its policies the UK regains, the less favourable the market access it keeps.

Norway enjoys membership of the EEA. It is not part of the common fisheries policy, though it does have agreements on fisheries with the EU. It is not a member of the common agricultural policy. It is also outside the EU customs union, which allows Norway to sign free trade agreements with other countries in conjunction with its partners in the European Free Trade Association. Norway’s exports to the EU are subject to “local content requirements”, however. Content requirements are an obstacle to trade where supply chains are complex. Such requirements do not apply to countries inside the customs union.

Norway is, however, treated as a full member of the single market. As a result, it must apply the entire acquis communautaire governing the free movement of goods, persons, services and capital, along with a range of supporting policies, covering transport, competition, social policy and so forth. Norway has no say in the decisions over these regulations. Thus, a member of the EEA preserves favourable terms of access but has limited power of independent decision-making, loses influence over decisions that bind it and cannot control immigration. For those desperate to leave, this cannot make sense.

At the opposite end, the UK could trade with the EU, as much of the world does, in accordance with the rules of the World Trade Organisation. But the UK is far more dependent on its trade with the EU than, say, the US, partly because of its proximity and partly because of its history of membership. It is crucial that the WTO has been quite unsuccessful in opening trade in services, because regulations (including on movement of people) are so important in this sector.

The challenge for the UK is to obtain better access than under the WTO, while retaining more independence than under EEA membership. Ruth Lea, adviser to Arbuthnot Banking Group, recommends Switzerland’s position: inside EFTA (but not in the EEA), while still enjoying favourable access to EU markets in financial services.

This seems the best of both worlds but that is a delusion. Remember: the UK was a founder member of EFTA (in 1960) but left because it did not give it the influence in European affairs it desired. It is possible that the UK could agree a free trade arrangement with the EU but anything like the Swiss deal would impose substantial difficulties.

First, the EU insists that the free movement of labour is non-negotiable for Switzerland. It is even possible that the UK could not negotiate a free-trade agreement mainly in goods, without it.

Second, the notion of “regulatory equivalence”, necessary for a deal to cover services, means the UK could not allow its regulatory regime to deviate significantly from that of the EU. Moreover, the EU would decide whether the UK’s regime remained equivalent. Why this would be better for the UK than today’s position is entirely unclear.

Finally, the UK would suffer substantial and inevitable losses in the quality and so quantity of its role in euro-denominated finance. In the most recent National Institute Economic Review, Angus Armstronglays out the dangers. UK-based financial institutions would almost certainly lose automatic“passporting” rights into the EU. UK-based activities would also be affected by poorer access to the euro payment system. The UK would almost certainly suffer a loss in the scale of swap lines offered by the European Central Bank. Central counterparty clearing would shift inside the eurozone in order to retain better access to ECB liquidity.

London is not Zurich: it is the financial capital of Europe. Just as the US would not allow Toronto to be the financial capital of the US, the eurozone would do what it could to shift euro-denominated transactions away from the UK. The ECB, in particular, would no longer be obliged to treat London-based activities as if they occurred within the eurozone. London would remain a big financial centre but George Osborne’s view that “tens of thousands” of jobscould be lost is not that exaggerated.

The more “independence” the UK seeks, the worse its access to EU markets would become, particularly in regulation-intensive financial sectors. An honest Brexiter should insist that the freedom they seek is worth such a price. So beware the Brexiter who offers free lunches. The world is not that generous.Britain-after-Brexit-would-sacrifice-access-for-independence-—-FT

+++ V.V.I. (FT) Brexit: sovereignty is not the same as power- Martin Wolf

(FT) If Britain were to vote to leave the EU in June would it regain the sovereignty that those in favour of leaving argue it has lost? The answer is no. The very fact that the UK is holding this vote proves that it remains sovereign. The referendum is not about sovereignty. It is about how best to exercise the country’s power.

In his pamphlet, Sense on Sovereignty, published in 1991, Sir Noel Malcolm explained that the starting point for any debate on sovereignty should be the distinction between power and authority. A sovereign state possesses the authority to make and implement valid law. A state’s power might be weak, but it is subject to no higher authority. Today, the fact that lawmaking institutions are democratically accountable creates legitimacy. An illegitimate government is a despotism.

States exist to serve the interests of their citizens. They can achieve that objective only through co-operation with other states. For this reason, the UK has signed 14,000 treaties. Legally, the UK could withdraw from them all. Since it does not wish to become North Korea, it will not do so. Treaties do not undermine sovereignty, but express it. They constrain the exercise of sovereignty, with the intention of making it more effective. They do so by delegating powers. Some of these powers are matters of life and death. The UK is a member of Nato, for example, because it believes, rightly, that it enhances the security of its citizens.

Is the EU different from other treaties? The answers are: “no” and “yes”.

The answer is no, because the UK can clearly withdraw. This would be complex and painful and might lead to the break-up of the UK, with Scotland deciding to leave. But nobody would seek to stop it. Thus the UK’s membership of the EU does not limit its sovereignty. That remains with the British people’s elected representatives in parliament. The answer is yes, because, as a member, the UK is bound by the treaties, by rulings of the European Court of Justice and by decisions reached by the European Parliament and by qualified majority voting in the Council.

The political question in the referendum is not about sovereignty but about the delegation of powers within a treaty-governed system of particularly far-reaching obligations. Future changes in the relationship between the UK and the EU could make membership effectively irreversible: abolition of the UK parliament would be one, and transfer of full powers over taxation or security could be another. Even membership of the single currency could be viewed in the same way. But, without such far-reaching changes, the UK remains sovereign.

The question for the UK is whether EU membership strikes a sensible balance between accountability and effectiveness in the exercise of those delegated powers. Yes, the UK is committed to things that many want to avoid — free movement of people, for example. But how does the balance look, overall?

Thatcher accepted the argument for qualified majority voting, to create a single market, for a good reason: without it, that would probably be impossible

The defects of the EU on accountability are real. The single currency is the best example: the gulf here between accountability, still largely national, and decision-making, now largely supranational, is glaring. Yet the UK is not part of this. The defects of the EU over democratic accountability cannot be solved without truly supranational politics. This is highly unlikely. It would also be highly unwelcome to the UK, since it would terminate national sovereignty.

Yet the EU is also about effectiveness. Charges that President Barack Obama is being hypocritical in arguing in favour of UK membership of the EU miss the point. The US is a superpower: it does not need such an arrangement to influence the world. The UK is not a superpower: it does. Margaret Thatcher accepted the argument for qualified majority voting, to create a single market, for a good reason: without it, that would probably be impossible.

A salient issue is whether the powers delegated to the EU go beyond what is appropriate to the goals the UK seeks. The answer, notes a report from the Centre for European Policy Studies, is no. The UK’s “balances of competences” review concluded that the powers delegated were appropriate to the goals the UK wanted to achieve. Repatriation of competences duly vanished from the government’s negotiating goals.

The question then is whether membership of the EU is an appropriate exercise of UK sovereignty. Yes, we can identify difficulties over accountability. Yet we also see huge gains in effective exercise of power.

Membership gives the UK a say in the future of the European continent. It gives it a potent voice in the positions on global affairs of one of the world’s most powerful actors.

It magnifies the UK’s ability to influence global developments that are of vital interest to the welfare of its citizens, such as over climate. It gives it, not least, favourable terms of access to its biggest market.

Should we seek substantial further delegation of powers to the EU? Definitely not. But the benefits of what the UK now has — most of the advantages with few of the disadvantages — seem not just evident, but truly substantial.

The strongest criticism of Mr Obama was that he spoke for US interests, not the UK’s. This is doubly mistaken. First, US perceptions of US interests are themselves important in defining UK interests. Second, candid friends often see one’s own interests better than one can oneself.

UK sovereignty is not at stake in this referendum. It is, instead, proved by it. The referendum is rather about whether the UK has delegated excessive powers to the EU. The big achievement of David Cameron’s negotiations is to establish that the UK will go no further. Our partners appear to accept this.

That being so, the best balance between accountability and effectiveness lies with the status quo. The price of Brexit will be much diminished effectiveness and, at best, moderately greater accountability. That price is far too high.aqrffgyunniorc

+++ V.I. (FT) Martin Wolf – Arguments for Brexit do not add up

(FT) If the UK voted to leave the EU, it would almost certainly be outside the arrangement organising the life of our neighbours and principal economic partners forever. Given this, the question is whether the option to leave should be exercised now. My answer is: absolutely not. To see why, let us examine popular arguments in favour of departure.

First, membership has brought few benefits. This is false. The Centre for European Reform estimates that it has raised trade with EU members by 55 per cent,increasing productivity and output. Trade creation within the EU has far exceeded diversion of trade from elsewhere. Europe has also brought a strong competition policy and control of state aid. These are important gains.

Second, membership has imposed huge costs. In fact the net fiscal cost is a mere 0.5 per cent of gross domestic product. Moreover, this could be regained in full only if the UK abandoned altogether its preferential access to the EU market. The UK is also one of the least regulated high-income economies. Its recent labour market performance demonstrates its continuing (and remarkable) flexibility. A study from the Centre for European Policy Studies adds that only “6.8 per cent of UK primary legislation and 14.1 per cent of UK secondary legislation” was passed in order to implement EU law.

Third, an increasingly integrated eurozone will dictate to the UK. Yet a full political union of the eurozone looks quite unlikely. Its members also differ on many points, which opens up opportunities for UK influence.

Fourth, the UK should leave because a eurozone break-up would damage the UK economy. If the eurozone broke up in a disorderly fashion, the damage to its closest partners might be substantial. Yet the EU will remain the UK’s biggest trading partner indefinitely. Thus the UK would be damaged by a eurozone break-up, whether in the EU or not. Arguing that leaving would shield the UK against such a disaster would be like arguing Canada should leave the North American Free Trade Agreement, to avoid a US financial crisis. It makes no sense.

Fifth, the UK should leave because the EU is slow-growing. It is plausible that the UK’s trade with the rest of the world will expand relative to trade with its slow-growing neighbours. But reducing access to EU markets deliberately would make sense only if membership prevented the UK from trading with the rest of the world. Germany’s export performance demonstrates that it does not.


Sixth, membership of the EU prevents the UK from opening up world markets. Yet the EU was a moving force in three successful global trade negotiations: the Kennedy, Tokyo and Uruguay rounds. It has increasingly turned towards preferential trade arrangements. The clout of the EU gives it far greater capacity to open up the markets of, say, China, India or the US than the UK could do on its own.

The clout of the EU gives it far greater capacity to open up markets than the UK can do on its own

Seventh, it would be easy to agree on alternatives to EU membership. Yet those recommending leaving have no agreed position. There are three plausible alternatives: full departure with trade regulated by the World Trade Organisation, which would cost the UK its preferential market access to the EU; Swiss-style membership of a trade arrangement in goods, with bilateral deals in other areas, which is complex and would require the UK to retain free movement of people; and Norwegian-style membership of the European Economic Area, giving full access (except for having to abide by rules of origin in trade in goods) but would deprive the UK of a say on regulations. In all, the more sovereignty the UK wishes to regain, the less preferential access it retains. This trade-off cannot be fudged.

Eighth, it will be easy for the UK to obtain whatever it wants from the EU. Sometimes this argument is buttressed by the statement that the rest of the EU runs a trade surplus with the UK, which it will be desperate to keep. This is naive. Divorces are rarely harmonious. Moreover, countries with big surpluses with the UK (notably Germany) would continue to sell their goods to the UK, even if Brexit led to a small rise in the import tariff. The share of UK trade done with the rest of the EU is also far greater than the share of EU trade done with the UK. Thus the idea that a departing UK could dictate terms is a fantasy.


Above, all those promoting departure ignore what the UK’s European partners think about the EU. The political elites, particularly of Germany and France, regard the preservation of an integrated Europe as their highest national interest. They will want to make clear to all that departure carries a heavy price. That price is likely to include attempts to drive euro-related financial markets out of London.

Ninth, it will be easy to reach an agreement on controlling immigration. But if the UK wanted to retain preferential access to EU markets it would be required to retain labour mobility. If, instead, it abandoned attempts to retain preferential access, it might then impose work permits on EU citizens. This would make the UK jobs market more inflexible, particularly for skilled people. As important, the EU would reciprocate. That would adversely affect British people working and living in the EU.

Tenth, the uncertainty associated with leaving the EU would be modest. In fact, the uncertainties would be pervasive: we do not know what the UK government negotiating an exit would want; we do not know what the rest of the EU would offer; we do not know how long negotiations would last; and we do not know what the outcome would be.


Those in favour of leaving offer fantasies of damage done by staying and of opportunity opened by departure. None of these arguments has much merit. The rational thing to do is for the UK to continue to enjoy its unique arrangement, which has brought it the advantages of membership with so few of the disadvantages. As our foreign friends tell us, to do anything else would be mad.Arguments-for-Brexit-do-not-add-up-—-FT

+++ (FT) Martin Wolf: Public sector needs to do a better job with assets

(FT) What is not measured does not count. This is dramatically true in discussion of the public sector. A few numbers — the annual financial deficit and the stock of debt — dominate the debate. The result is chronic mismanagement. The current UK debate, for example, largely ignores assets and makes little distinction between current and capital spending. The present focus also ignores many liabilities and pays little attention to management of assets.

What is happening is like looking for lost keys where the lamp’s light falls rather than where they might have fallen. Because the Treasury has made net public debt an objective, it seeks to shift liabilities to what are often more expensive covert obligations. This has been notably true of the private finance initiative for public sector projects. Another example is the desire to persuade the private sector to fund infrastructure, despite the latter’s higher funding costs. Arguments do exist for shifting from traditional public sector funding. Reducing overt debt is not among them. Similarly, converting a stream of income into a capital sum makes sense only if its value to buyers exceeds that to government. Thus, selling the student loan book is unlikely to make the government better off.

Yet the UK is also one of the world’s leaders in preparing “whole of government accounts” (WGA). These provide comprehensive and transparent information, similar to that required of private businesses. The 2016 Green Budget from the Institute for Fiscal Studies offers an interesting analysis. In the WGA, net liabilities have more than doubled, from £0.8tn on 31 March 2009 to £1.85tn five years later. This reflects a rise in public sector pension obligations, to £1.3tn, in addition to the near-doubling of public sector net debt from £0.7tn to £1.4tn. The picture may not be pretty, but it is more truthful.

Even these accounts provide no simple guide to managing the public sector. The latter is not a business. Its aims are far wider than that. Furthermore, governments can raise taxes. Nevertheless, if governments fail to manage their balance sheets — risks included — wisely, they will surely damage their countries.

As Dag Detter and Stefan Fölster argue in their important book, The Public Wealth of Nations, the potentially commercial assets owned by governments are vast. In the UK plant and equipment, property and other assets were £1.3tn in March 2014, just under 80 per cent of gross domestic product. The International Monetary Fundreckons public assets are relatively even larger in many countries. In aggregate, according to the authors, governments are the largest asset managers of all.

Mr Detter and Mr Fölster argue that the new UK accounts are imperfect. Nevertheless, they are a start to needed improvements in management of assets. Indeed, the value of public assets depends on how they are managed.

One aspect would be independent and professional identification and evaluation of public sector infrastructure programmes. This was a recommendation of the Growth Commission of the London School of Economics. The Public Wealth of Nationsargues, in addition, that existing public wealth needs to be professionally managed, in order to gain a higher income.

For the world, the implications might be quite dramatic. The book argues, for example, that professional management of public wealth might raise an extra income to governments of $2.7tn annually. In the UK, the physical assets of the National Health Service and the Ministry of Defence seem ripe for more professional management. The ownership of assets does not need to be private. But management needs to be professional, unified and subject to incentives for improved performance.

In this way, better accounting might lead to better policy and improved management of assets and liabilities. This is not only important for the UK. It could make a big difference to the eurozone where the accounting is quite poor.

In the UK, the appointment of Tom Scholar as the permanent secretary to the Treasury might provide an opportunity. He should make it one of his objectives to shift away from the obsession with debt, to a broader view of the balance sheet. Once the Treasury is focused on what needs to be measured, it can drive the improved management of public assets, both existing and new, that the country needs.

The time is long past to end the focus on a few narrow numbers that led to chronic under-investment, as well as under-management of valuable assets. It is time for the UK debate on public finances to shift from being precisely wrong to trying to be roughly right.cgloazsdrt-1

+++ (FT) Martin Wolf: Why fossil fuel power plants will be left stranded

(FT) Virtually all new fossil fuel-burning power-generation capacity will end up “stranded”. This is the argument of a paper by academics at Oxford university. We have grown used to the idea that it will be impossible to burn a large portion of estimated reserves of fossil fuels if the likely rise in global mean temperatures is to be kept below 2C. But fuels are not the only assets that might be stranded. A similar logic can be applied to parts of the capital stock.

February was the warmest month on record. The current El Niño — the warming of the global climate triggered by the Pacific Ocean — has boosted temperatures, just as it did in 1997-98. The recent supposed pause in rising temperature was relative to the sudden jump at that time. A comparison between 1998 and today shows temperature continues to climb, together with atmospheric stocks of carbon dioxide. This reminds us of the realities of climate change.

Moreover, two forms of inertia govern climate policy. First, infrastructure in power generation, which generates a quarter of all anthropogenic emissions, is long-lived. In the EU, 29 per cent of thermal power plants are more than 30 years old and 61 per cent are more than 20 years old. Second, carbon dioxide remains in the atmosphere for centuries. Thus it is necessary to think not of annual flows but of cumulative emissions or of a global carbon budget.

The Oxford paper assumes (optimistically) that emissions from all other sectors proceed in accordance with the emissions pathway judged by the Intergovernmental Panel on Climate Change to give a 50 per cent chance of keeping the temperature increase below 2C. It assumes, as well, that new generating plants are operated to the end of their normal economic lives. Under those assumptions, capital stock created after 2017 would break the global carbon budget. Yet, in the past decade alone, the emissions implied by the investment in power generation have been rising at 4 per cent a year. To shift suddenly to zero emissions would appear inconceivable.

Accelerated falls in emissions from other activities would alleviate the pressing nature of this dilemma, but only modestly. Worse, the reliance on fossil fuels of transport will be harder to cut sharply than that of power generation. Indeed, decarbonisation of the latter is the most effective way to decarbonise tran­sport, by means of rapid spread of electric vehicles.

Martin Wolf

Within power generation itself, there are four options. The first would be a more or less immediate shift to zero-emissions technologies. The second would be retrofitting of conventional capacity with carbon capture and storage. The third would be to replace new capital stock with zero-emissions capacity early in its life. The last would be early introduction of technologies to remove atmospheric stocks of carbon.


Cutting the average life of generating plants by a decade would delay the “commitment year” — the point of no return — to no later than 2023

Zero-carbon energy includes renewables, biomass, hydroelectricity and nuclear power. Costs of renewables are falling rapidly. Challenges remain, notably grid integration and storage. The question is now more “when” than “whether”. It is not going to be next year — not even if assisted by an accelerating rise in energy efficiency.

Again, some form of carbon capture and storage seems a vital part of any solution. But these technologies remain largely untried and expensive. That is one reason why a rapid shift in investment patterns appears crucial.

The option of proceeding with investment in a conventional plant only to scrap it early would be wasteful and in­effective. Cutting the average life of generating plants by a decade would delay the “commitment year” — after which we would have to scrap additional installed capacity before it reached the end of its normal economic life — to no later than 2023. This leaves little time to transform the world’s investment path.

Martin Wolf

It would seem wiser to install zero-emissions capacity faster now instead. That is likely to be particularly beneficial because the costs are falling with cumulative production.

In the last resort, carbon removal or other forms of geoengineering might be employed. Yet all such technologies create technical, and even geopolitical, risks. If, for example, a country unilaterally intervened directly in the climate, the consequences for global relations would be unsettling or catastrophic.

Far from having years to work out how to curb the risks of climate change, we face an imminent moment of truth. This also raises urgent policy questions.

If carbon pricing were to deliver the desired shifts in investment, it would require credible commitment over the long term. But commitments for the long term can barely be credible. A novel approach would be imposition of cumulative caps on national emissions. Alas, their credibility would be low even if they could be agreed at all. An alternative might be licensing of new and existing power plants, to force shifts in technology and accelerate closure of carbon-emitting capacity. But such licensing would again have to be imposed quickly: otherwise, a race to build soon-to-be grandfathered conventional capacity would ensue.

It would also be possible either to subsidise or to tax specific technologies. But this will be vulnerable to capture by existing or newly created vested interests. Finally, it is highly desirable to invest in research and development. It is a long-time scandal how little is invested in such R&D relative to subsidies to fossil fuels by governments.

After last year’s Paris climate conference, the world congratulated itself on having agreed a new process, even though real action was postponed. Yet, given the longevity of a large part of the capital stock, the time for decisive change is right now, not decades in future. But the world is not really serious about climate, is it? It prefers fiddling while the planet burns.ythnko

+++ (FT) Martin Wolf: The welfare state is a piggy bank for life

(FT) How is the “welfare state” to be justified? The usual answer is that it is a way for the well-off to help the less well-off. But this is not its only role.It is also a “piggy bank”, as Nicholas Barr of the London School of Economics has argued. More precisely, it is a substitute for markets that the private sector does not offer.

Put aside spending on services, such as education or health; focus on benefits paid to individuals, such as housing benefits, tax credits paid to those in work and pensions. In the UK, such benefits amount to a huge sum: 33 per cent of current spending (and 12.5 per cent of gross domestic product) in 2014-15.

In the short run, spending on benefits is largely redistributive. This role of the state is undoubtedly important at all times. But it is particularly significant in the aftermath of a crisis that has left the economy as a whole far smaller than everybody had expected. The Institute for Fiscal Studies, a London-based think-tank, has concluded that changes in taxes and benefits between May 2015 and April 2019 will fall proportionately most heavily on the poorest parts the population. The relatively well-off could have borne more of this burden. The government chose otherwise. Everybody should decide for themselves whether they think this was right.

Such decisions can themselves have significant long-term implications. If, for example, a cut in benefits were to re­duce parents’ ability to support their children, the longer-term economic and social impacts could be highly damaging. But it is when one looks at the welfare state’s impact over the course of a life that something perhaps even more profound emerges: its role is, it seems, as much about distribution of income over lifetimes as among people.

Evidence for this comes from another IFS study, published last year. This examined the effects of the tax and benefit systems on people born between 1945 and 1954 — the baby boomers. It reached four big conclusions.

First, income is far less unequal over lifetimes than in any given year. This is because a big proportion of inequality is temporary, a result either of changing needs as people age or transitory shocks.

Second, largely as a result, more than half of the redistribution achieved by taxes and benefits is over lifetimes rather than among different people,

Third, in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year.

Finally, in-work benefits are just as good as out-of-work benefits at helping people who remain poor throughout their lives but they do less damage to incentives to work. Higher rates of income tax, meanwhile, target the “lifetime rich” relatively well because mobility at the top is relatively modest.

The finding that taxes and benefits distribute incomes over individuals’ lifetimes even more than among individuals should be seen not as a bug but as a feature of the welfare state.

The argument here is that a necessary condition for economic efficiency is “complete markets”: that is, a market for every asset in all possible states. Evidently — because of pervasive uncertainty, asymmetric information, transaction costs and so forth — complete markets do not and cannot exist. This is not some theoretical curiosity. As a result of these failings, private insurance against unemployment or big temporary loss of income, and borrowing against earnings in the distant future, are difficult if not impossible.

The state is in a good position to rectify these failings, partly because it can monitor behaviour and avoid adverse selection (that is, ending up stuck with only bad risks) by insisting that everyone joins the insurance pool. Of course, the state may design such programmes very badly. Insurance also creates “moral hazard”. But one can limit such damage while helping people through temporary difficulties or the exceptional demands of some stages of life.

The 2015 IFS study suggests this is precisely what the UK’s tax and benefit system does. Publicly financed education and health services strongly reinforce such effects: people gain the biggest benefits from the former when young and from the latter when old.

In designing the structure of taxes and benefits, such lifetime effects are at least as important as those at any moment. These effects include the role of the welfare state as both insurer and bank. Government plays these roles in all high-income nations, including even the US. It is a desirable one. Yet careful design is also needed. The starting point must be with greater awareness of this truth.The-welfare-state-is-a-piggy-bank-for-life-—-FT

+++ V.V.I. (FT) Martin Wolf: China’s future challenge for the world economy

(FT) The country is systemically important and suffers high and rising corporate indebtedness.

© James Ferguson

China’s attempted economic transition has deep implications, not just for the emerging nation, but for the rest of the world. In the short term, the challenge is to manage spill­overs from what might be a sharp slowdown in China’s economic activity. In the long term, it is how to cope with the integration of a financial powerhouse into the world economy. In reality, however, what happens in the short term will shape the longer term as well.

India’s latest Economic Survey provides a thought-provoking taxonomy of crises. The external impact of a crisis depends, it argues, on whether it occurs in systemically important countries, it is the result of fiscal or private borrowing and whether currencies of affected countries appreciate or depreciate.

What might this analysis have to do with China? The answer is that it is a systemically important country that suffers from high and rapidly rising corporate indebtedness. This might lead to a sudden halt in investment and a rapid depreciation.

Such a sharp slowdown is not at all impossible. The combination of an ultimately unsustainable rise in corporate debt with the dependence of demand on ultra-high rates of investment creates the vulnerability.

As the economy slows to growth below 7 per cent a year, investment rates of close to 45 per cent of gross domestic product no longer make economic sense. The private sector is also responsible for close to two-thirds of investment. So market forces might impose a painful adjustment.

One might envisage two government responses: a huge increase in fiscal deficits, as in the western financial crises, and a more aggressive monetary policy. But a weaker exchange rate might also be welcome, as a way to offset domestic deflationary pressures.

At the China Development Forum held in Beijing this month, Zhou Xiaochuan, the People’s Bank of China governor, indicated that it was reasonable to run down foreign currency reserves built up on a massive (and unplanned) scale.

But there must be some limit to that. Controls on capital outflows could also be tightened, even though that would go against China’s plans for opening up the capital account.

While the Chinese economy has been weakening, monetary and credit policy loosening and the exchange rate falling, no such crisis is to be seen as yet. The main drivers of the capital outflows also seem to be prepayment of foreign-currency loansand the unwinding of “carry trades”, partly triggered by perceptions of a greater risk of a depreciation of the renminbi. Again, while weakening, the growth of demand has certainly not collapsed. So far, so good then. But this story is not over.


The world economy is in no position to absorb another big deflationary shock. The possibility of such a shock from China over the next several years is real. But a longer-term issue also arises: how to integrate China into the global financial system.

Experience suggests that simultaneous liberalisation and opening up of fragile financial systems often ends in vast crises. If the country concerned is systemically important, such crises will be global. Floating exchange rates may weaken the impact. Even so, a crisis in a systemically important economy will have huge effects.

For this reason, the opening up of China’s financial system to the world must be regarded as a matter of global concern. A recent paper from the Reserve Bank of Australia illustrates some risks. A significant aspect is the potential for a vast increase in two-way flows of portfolio capital, which are still modest from and to China.


At present, controls on outflows remain tight. But consider some relevant magnitudes: China’s gross annual savings were about $5.2tn in 2015, against $3.4tn in the US; its stock of “broad money”, the widest measure of the money supply, was $15.3tn at the end of last year; and the total gross stock of credit in the economy was about $30tn.

China is the savings superpower. It is not hard to envisage a huge gross outflow, due to portfolio diversification and capital flight, should controls be lifted. Against such vast potential outflows, foreign-currency reserves as large as $3.2tn would be swiftly exhausted. While there would also be foreign portfolio demand for Chinese assets, the domestic policy and institutional changes needed to make that a reality are likely to be impossibly demanding.


It is probable, then, that the impact of capital account liberalisation would be a large net capital outflow from China, a weaker exchange rate and a bigger current account surplus. Weaker investment would reinforce this. It is hard to imagine how such a shift could be accommodated. One needs only to think of possible impacts on asset markets, exchange rates and current account balances in the rest of the world economy.

In her speech at the China Development Forum this month, Christine Lagarde, managing director of the International Monetary Fund, noted rightly that “increased global integration brings with it greater potential for spillovers — through trade, finance or confidence effects. As integration continues, effective co-operation is critical to the functioning of the international monetary system. This requires collective action from all countries.” Right now, nothing is more important than the co-operative management of the immediate stresses in the Chinese economy and the longer-term challenges of China’s financial integration.

If either were to be mishandled, it could put unbearable pressure upon our integrated global economic system. The world economy is still struggling to handle the aftermath of the western financial crises. It might fail to cope with a Chinese one altogether. The last time a hegemonic financial power emerged, the world suffered the Great Depression. It has to do better this time.scghu

+++ V.I. (FT) China’s struggle for a new normal – Martin Wolf

(FT) Beijing seems strangely indecisive on the economy and yet increasingly authoritarian in politics.

Mandarin duck
© James Ferguson

What is going to happen to the Chinese economy in the coming five years? This is one of the most important questions for those interested in the world’s prospects. Participating in this year’s China Development Forum offered a fascinating window into how the country’s policymakers view the challenges ahead. Insight came from the speeches and papers prepared by scholars working at the Development Research Center of the State Council.

The country confronts four principal challenges. The first is how to transform its pattern growth, quantitatively and qualitatively. The second is how to manage the inevitable slowdown in underlying growth relatively smoothly. The third is how to manage China’s interface with the world economy. The last is how to manage its domestic political evolution.

In the first place, China has accepted a slowdown in the trend rate of growth. In the period covered by the 13th five-year plan (2016-2020), this is forecast to be no lower than 6.5 per cent a year. While that would be fast by world standards, it would be slow by China’s, at least until recent years (see chart).

This would, however, still deliver a doubling of real gross domestic product per head between 2010 and 2020. That would be in keeping with former president Hu Jintao’s stated goal of achieving “moderately prosperous society” by that date. At that point real GDP per head, at purchasing power parity, should be close to a third of US levels.

A large slowdown in the headline rate of growth does not entail a large reduction in the growth of the welfare of the Chinese people. The headlong growth of the recent past has been associated with low-return investment, excess capacity, pollution, rising inequality and under-investment in social consumption, notably on the environment, health and education. It should even be possible for China to achieve high growth in living standards with substantially slower GDP growth. Indeed, it might be better to abandon the GDP growth objective altogether, in favour of one for growth of consumption, both public and private.

At the forum, Zhang Gaoli, the vice-premier, emphasised plans to change the quality of growth. He stressed the need for a more innovative economy and the urgency of controlling pollution. The shift to a low-carbon economy offers a huge opportunity for economic progress. Beyond this, the five-year plan promises reform of the urban registration system (“hukou”), in order to encourage permanent migration from the countryside. The economic and social benefits should be large.

This brings us to a closely related second challenge. These benign long-run changes cannot conceal the immediate gloom. It is precisely when an economy slows that its disequilibria are thrown into sharpest relief. China invests close to 45 per cent of GDP. This extraordinarily high level is hard to justify as growth slows. Furthermore, this high investment level is associated with explosively rising debt and falling growth in total factor productivity, a measure of technical progress. Such a path is unsustainable (see charts).

Chart: Martin Wolf's column

As the economy slows and growth shifts from manufacturing and construction towards services, the private sector’s need to invest must shrink. But investment also generates almost half of all demand. Sustaining aggregate demand as investment growth weakens will be very challenging. Policymakers have the tools to prevent a financial crisis but avoiding an unexpectedly sharp slowdown in demand (and so growth) would be quite hard.

The temptation for policymakers is already to restart the credit-fuelled investment engine. That, however, would postpone necessary adjustment and so almost certainly create a bigger adjustment shock down the road.

This brings us to the third challenge: managing the country’s interface with the world economy. The economic slowdown of a high-saving China creates a double challenge. One is the effect on global demand, especially for commodities. Another, also now evident, is the tendency for an outflow of surplus funds to weaken the exchange rate and so increase exports and the current account surplus. Beijing seems prepared to let foreign currency reserves run down rather then tighten outflow controls sharply or let the exchange rate fall. How these pressures are resolved will have global significance.

Chart: Martin Wolf's column

Fortunately, the authorities have developed imaginative ideas for using the surplus savings to promote development abroad. They include the “one belt, one road” programme for enhanced investment in overseas transport infrastructure and the creation of the Asian Infrastructure Investment Bank. China’s annual gross savings are now about $5tn. Finding ways to use this vast flow productively, at home and abroad, will be a challenge.

Finally, the envisaged transformation of China into a prosperous market-oriented economy creates a big political test. Beijing must be decisive and yet responsive to the needs of the people. At present, it seems strangely indecisive on the economy and yet increasingly authoritarian on the politics.

Only a fool would consider political instability anything but a disaster for China and the world. Equally, the desire of President Xi Jinping to attack corruption and so strengthen the legitimacy of the Communist party is understandable.

It is hard, though, to believe that an innovative and outward-looking China can be contained indefinitely within the straitjacket of an all-powerful party-state. Its political institutions must surely move beyond the “democratic centralism” invented by Vladimir Lenin a century ago.

The challenges are daunting. It is only the successes of the recent past that provide confidence in those of the future.lçuyt

+++ (FT) V.I. The age of uncertainty is upon us – Martin Wolf

(FT) How are we to manage public finances if the economy does not return to pre-crisis trends?

An employee fixes a wheel to a new Nissan Juke automobile, manufactured by Nissan Motor Co., at the company's production plant in Sunderland, U.K., on Wednesday, Nov. 27, 2013. Britain's consumer and housing-driven recovery, the fastest among Group of Seven nations, risks losing steam unless export growth picks up, economists said. Photographer: Chris Ratcliffe/Bloomberg
Nissan plant in Sunderland © Bloomberg

Productivity is not everything, but in the long run it is almost everything. This truth, enunciated by the Nobel laureate Paul Krugman, has just bitten George Osborne, the UK chancellor. But the prospects for productivity are not important just to Mr Osborne. They are the most important uncertainty affecting the economic prospects of the British people. Is it reasonable to expect a return to buoyant pre-crisis productivity growth? Will productivity continue to stagnate? Or will it end up somewhere in between?

The negative impact on the budgetary position of the Office for Budget Responsibility’s mild revisions to productivity projections shows how much this matters. The reduction in the OBR’s forecast rate of growth in output per hour — a basic measure of productivity — is only by an average of 0.2 percentage points a year. Yet, notes the OBR, “cumulated over five years, that represents a material downward revision to the level of potential output by 2020”.

In its latest forecast, the OBR expects UK productivity levels to be 6.2 per cent lower in 2020 than it had hoped in June 2010 and 2.5 per cent lower than it had hoped in March 2014. But the biggest downgrades of all are relative to the pre-crisis optimism: the OBR’s latest forecast for potential output in 2020 is 15 per cent below the Treasury’s March 2008 forecast. Similar downgrades have occurred to the official US forecasts.

Yet even the new forecasts might be too optimistic. The question is whether the post-crisis productivity stagnation or the pre-crisis productivity growth will be the next normal. The OBR still largely assumes the latter. Thus, the 1971-2007 average growth of productivity was 2.2 per cent a year. The 2008-2015 average has been a mere 0.3 per cent. The latest forecast is that productivity growth will rise from 0.8 per cent last year to 2 per cent by 2019. That would be close to to pre-crisis norms.

Assume, instead, that productivity growth will be 1 per cent this year and stays there. Potential output in 2020 would be 4 per cent lower than the OBR now assumes. That would leave the chancellor not with his planned surplus, but a big fiscal deficit. Thereafter, the gap between output with productivity growth at 2 per cent and output with productivity growth at 1 pe r cent would rise further: by 2030, potential output would be 13 per cent lower than a continuation of the OBR’s latest productivity growth assumption would imply.

Evidently, we need to understand why productivity growth has been so weak. The OBR concludes that productivity growth has been lower in most industries since 2008, with the most pronounced falls in financial services and supply of gas and electricity. On balance, then, the decline in productivity growth has been across the board.

One explanation might be the impact of the financial crisis on credit. But, as the financial sector heals, this is less persuasive. Another explanation must be the post-crisis collapse in business investment, to a low of 8.1 per cent of gross domestic product, in real terms, in the fourth quarter of 2009. But this has since recovered. It would be good if business investment were still higher. But it is hard to believe that low investment continues to explain the persistent productivity disappointments. Again, GDP might be mismeasured. But it is difficult to understand why such mismeasurement suddenly jumped after 2008. Maybe growth of GDP and productivity is higher than measured. But that should also have been true before 2008.

Given the huge uncertainty, the OBR has made only a modest step in the direction of assuming the reduction in productivity growth is permanent. It could easily still be far too optimistic.

So how should policymakers respond to these unpleasant uncertainties?

The first shift should be towards policies likely to raise productivity growth. An essential element in such a shift must be towards higher public and private investment. The government should invest more. It should also be looking at changes in the system of taxation that would encourage investment.

The second shift must be towards asking how to manage the public finances if the economy does not return to pre-crisis productivity trends. That would evidently require still tighter control over current spending. But it is also likely to require raising taxes that do not distort the economy. The obvious candidates are higher taxation of public bads (congestion and pollution) and heavier taxation of rents, particularly of land.

We must hope that the Treasury is devoting serious thought to these unpleasant contingencies. The OBR’s latest downward revision might prove to be a small step towards reality. Things could, alas, be worse. So prepare now.asdft

(FT) Chancellor George Osborne is in traps of his own devising – Martin Wolf

(FT) Fiscal gimmicks make it almost impossible to tell what he is doing to the economy.

What was the purpose of Wednesday’s Budget announcements? One aim was to escape the painful implications of the Office for Budget Responsibility’s new forecasts. A second goal was to advance a slogan: after years of cosseting the elderly, the government now says it plans to “put the next generation first”. A third objective was to spray policies upon the nation, the most important of which — abolition of local authority control over education — had nothing to do with fiscal policy.

In all, George Osborne is looking increasingly like Gordon Brown, his Labour predecessor but one: both the master of the government’s domestic policies and a purveyor of catchy gimmicks. Nothing that the chancellor of the exchequer announced in the Budget is of great relevance to the economic or fiscal health of the country. Indeed, on balance, the UK would have been just as well off without it. This is not to say that none of the individual measures is worthwhile. But they could have been proposed and justified far better outside a budgetary framework.

For reasons known only to himself, Mr Osborne decided to target an overall fiscal surplus by 2019-20. Just four months ago the OBR told him he was probably on target to achieve this objective. Now it has revised down the potential growth of productivity substantially. This may well be right: in truth nobody knows precisely what the potential rate of growth is going to be.

As a result the OBR has revised up its forecasts for the budget deficit by 0.5 per cent of gross domestic product, or £11.3bn a year, on average over the forecast period — before the fiscal measures announced on Wednesday. Consequently, states the OBR, “the government would have been on course to miss both its legislated fiscal targets — for the budget to be in surplus from 2019-20 and for debt to fall in relation to GDP every year until then”.

Targeting the difference between two large, highly uncertain numbers — total spending and receipts — for a particular date several years hence is a fool’s game. But that is how the chancellor has sought to prove his fealty to his “long-term plan” for fiscal probity. Having taken on an unwise target, he now has to employ smoke and mirrors to achieve it. One of the great merits of his creation of the independent OBR is that it makes it so transparent how he plans to do this.

The OBR now forecasts a £13.4bn deterioration in fiscal outcomes for 2019-20, largely the result of a £16.3bn reduction in revenue from a smaller economy. This is partly offset by a notional £2.3bn fall in departmental current spending, largely driven by £3.5bn in unspecified efficiency cuts.

So far, so murky. The government also plans to impose £2bn in additional pension contributions. Now come the fascinating parts of the new plan. Departmental capital spending is to be reduced by £1.2bn in 2019-20, essentially by moving £1.6bn forward to the two previous years. Does this change anything meaningful? No. Yet more slippery, the government has announced a £6.3bn increase in taxes for 2019-20. Yet this is solely due to a shift in the timing of receipts from corporation taxes. This, too, lacks any economic meaning. The government has also announced bigger cuts in spending for 2020-21. Maybe Mr Osborne expects to be doing something else by that remote date.

All this creativity cannot obscure the fact that cumulative borrowing is forecast to be £36.3bn higher between 2016-17 and 2018-19 than it was in November. Does this matter? No: there is no real sense in making big changes in fiscal plans in response to unexpected shifts in the OBR’s uncertain expectations about the future.

The chancellor’s claim to put the “next generation first” helps illuminate the absurdities of his approach. If this were his aim — it is not, as the long-established solicitude for the older generation demonstrates — the government would, for a start, look at the assets it is creating as well as the debt. That would require him to decide not just on a target for debt but also on one for public-sector net worth.

He would have regarded today’s ultra-low interest rates as an opportunity for a big jump in public investment. Similarly, he would be considering how to raise investment in housing and lower house prices. Among other things, such a focus would bring up aspects of fundamental tax reform, especially the possibility of shifting taxation towards land and away from earned income. In that context, proposed reductions in business rates would be seen as the wrong idea.

Inevitably, any proposals for coherent and worked out reform of the tax system, or of pension arrangements, or indeed of any policies that affect long-term decision-making will be viewed as naive. But this relentless piling up of one fiscal gimmick on another makes it almost impossible to work out what the government is actually doing to the economy. Policymaking could, and should, be vastly better than this.

On the details of new policies, there is, as always, too much to be taken in. But the argument for raising tax thresholds weakens with each successive rise since, by definition, it gives no benefit to those who already pay no tax. The steady reduction in the headline rate of corporation tax suggests the government is trying to turn the UK into Ireland. Is that desirable? The cut in capital gains taxes will also create big incentives for turning income into capital gains; and there is no good case for failing to raise fuel duty when oil prices have fallen so far. It looks as though the 2015 climate change agreement never happened.

Fortunately, aspects of the UK economy work well — notably the labour market, as Mr Osborne proudly notes. So does the monetary framework he inherited from the opposition Labour party. Both are the fruit of decent policymaking over long periods. It would be splendid if the UK could do the same for the tax system, land-use planning and the regime governing savings and pensions. Getting rid of the short-term cycle of budgetary announcements could be a step towards that aim.

But, so long as the Budget dominates economic policymaking, the focus will be on catchy announcements rather than fundamental reforms. Will any chancellor admit that the country could do better than this?Chancellor-George-Osborne-is-in-traps-of-his-own-devising-—-FT

+++ V.I. (FT) Good news — fintech could disrupt finance-Martin Wolf

(FT) Banking is currently inefficient, costly and riddled with conflicts.

Information technology has disrupted the entertainment, media and retail businesses and, most recently, the supply of hotel rooms and taxis. Is it going to do the same to finance? My first response is: please. My second response is: yes. As Bill Gates has said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.” This advice applies to people in the business itself, but also to policymakers.

Finance is an information business. Indeed it already spends a higher share of its revenues on information technology than any other. It seems ripe for disruption by information technologies. Consider its three essential functions: payment; intermediation between savings and investment; and insurance. All these activities are information-intensive. People need to know accounts have been settled. They need to understand how their wealth is being employed and to know that their risks are covered. Not least, the intermediaries need to understand what they are doing.

Today, banks and insurance companies are the core financial institutions. Banks manage payments systems, create most of the economy’s money, are responsible for a large proportion of financial intermediation, are creators of financial instruments and act as market-makers and agents. Similarly, insurance companies play the central role in assessing and managing risks.

Why might one hope that new financial technology, or “Fintech” as it is known, will transform these businesses? The answer, especially for banking, is that they are currently not done very well. Banking seems inefficient, costly, riddled with conflicts of interest, prone to unethical behaviour, and, not least, able to generate huge crises.

In a recent speech on the possibilities for a financial revolution, Andrew Haldane of the Bank of England notes that, astonishingly, the unit cost of US financial intermediation seems to be unchanged over a century (see chart). Moreover, income from finance simply rises and falls with the value of assets. That suggests a huge amount of rent-
extraction. Additionally, 10m US households and 1.5m UK adults still have no bank accounts. Worldwide, banks generate a staggering $1.7tn in revenue, 40 per cent of the total, from the job of making payments. In the computer age, settlement can still take hours or days.

On behaviour, as John Kay has written, “parts of the financial sector today . . . demonstrate the lowest ethical standards of any legal industry”. The payment of vast fines seems to be viewed as just a cost of doing business. Finally, the post-2007 banking crises were as big as any in the past. That their economic impact was not still worse than earlier was due to the willingness of governments to bail banks out.

New technology might help change this in at least two ways. First, it might transform payments. One possibility is real-time settlement via distributed ledgers. The advantages of instantaneous settlement are evident. The advantage of distributed ledgers, an element in bitcoin’s “blockchain” technology, is an improvement in the robustness of record-keeping. Instead of centralised accounts, the database would be shared across a network of sites, all of which would hold an identical copy. Such technologies might revolutionise domestic and foreign payments. Many businesses are already pursuing this possibility.

A second transformation might be via peer-to-peer lending, in which new platforms disintermediate the traditional businesses in matching savers with investments. Such lending is growing rapidly (see chart). The theory here is that computerised information might allow savers to dispense with the (costly) services of bankers altogether.

Optimists imagine a future in which payments, the creation of money (unquestionably liquid and safe assets), and intermediation would be separated. In this case, the capacity of the banking sector to create havoc would be reduced and so would the perils created by the state’s backstop to private institutions. It is, however, far too early to be confident of such benefits. Indeed it is easy to see that new record-keeping and payments systems would create huge security issues. Similarly, opportunities for malfeasance also exist on peer-to-peer platforms. Indeed, these are inevitable with transactions that rest on promises against an inherently uncertain future.

A further potential source of transformation is via “big data”. That might transform the quality of lending, for example, which would be a good thing. But the most striking effects are likely to be in insurance. With new monitoring devices, insurers might gain direct knowledge of the quality of driving or of the state of their clients’ health. Such information might be used to motivate improvements in behaviour. But it is also possible to imagine improvements in information so profound that risk pools — the basic building blocks of insurance — disappear. If, for example, the insurer knew with a high level of certainty that some customers would get a given disease, that person might become uninsurable. In insurance, some ignorance is bliss. At the least, the way in which knowledge is obtained and used could create huge social questions.

On balance, the opportunities afforded by the application of information technologies to our financial system seem large. The difficulty might rather be to ensure that the benefits accrue this time to the public rather than to a small number of incumbents or even to their more dynamic replacements. Finance, particularly banking, does need a revolution. But this is one area where policymakers cannot just assume things will work out well. It is because finance is so important that a revolution is needed. But for that very reason the revolution also requires careful watching.asd