Entangled Alliances

When domestic politics is getting you down, the international stage can prove a welcome diversion.  Just ask Bill Clinton.  But here in Britain we’re talking plummeting poll numbers, not impeachment, and the diversion of international economic policy, not cruise missile strikes.  Yes, what a breath of fresh air the international stage has been for Gordon Brown.  Far away from a seemingly insurmountable deficit in the polls, and rumblings in the Labour ranks, Brown has been reveling in a reputation as a far-sighted guru of economic policy, feted by the likes of Paul Krugman and fulfilling a boyhood dream (I’m with you Gordo) of addressing a Joint Session of Congress.  Next month, however, these two worlds will collide in a bold all-or-nothing attempt by Brown to merge the two currents of his premiership; an attempt to rescue his domestic political prospects and cement his role as a world leader in one fell swoop.  In April, the G20 is coming to town, and for Gordon Brown the stakes could not be higher.

photo credit: World Economic Forum

The London Summit, which will be held on one fateful day, April 2nd, is a follow-up to a session held last November in Washington D.C. – a session in which rather little was decided, except vague assurances about cutting taxes and increasing government spending.  The Prime Minister’s zeal was already clear at this stage.  He declared that the summit  was “the road to the new Bretton Woods. It is absolutely clear that we are trying to build new institutions for the future.”  For him, London is where the deal will be sealed.   His agenda is extraordinarily ambitious.  As the Economist sardonically put the issue:

The summit should not only stimulate the economy and renounce protectionism, but also bolster the IMF and other international financial outfits, revamp regulation, create an early-warning system for crises, and save the poor. It was as if Mr Brown thought the ailing economy would yield to an act of governmental will, if only it were colossal enough.

The Economist, ever pragmatic, argues that such overreach risks undermining the immediate necessities of global government stimulus and a united front against protectionism.  This pessimism seems to be borne out by the unenthusiastic noises coming from G20 capitals and an emerging transatlantic gulf in attitudes.  Below the fold, I look at the opposition to Gordon Brown’s plan for new financial institutions, and the implications for his domestic political fortunes.

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photo credit: AComment

When Barack Obama’s economic stimulus package passed into law last month, it was mostly greeted by economists as a much needed influx of government spending that should help to get the economy back on track . But among the plaudits were concerns about the effectiveness of the stimulus: specifically, it should’ve been bigger.

Now you might well question whether an $800 billion package could be described as “not big enough”. But it’s important to remember that around $300 billion of it was in the form of tax cuts – helpful to the families they were aimed at, no doubt, but not particularly useful in terms of job creation. Therefore, only $500 billion was actually in the form of direct government spending, and so when considering how much is needed to create enough jobs to get the economy back on track, only two thirds of the stimulus is actually “stimulus”. But even so, surely $500 billion is enough to get the job done?

Well, uh, no actually. It isn’t. The inadequacy of the stimulus, however huge it was, is made clearer every week as increasingly disastrous figures about the economy continue to be released. In his Monday New York Times column, nobel-prize winning economist Paul Krugman, calling for a second stimulus, points out that:

The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.

But isn’t Obama’s stimulus meant to make 3.5 million new jobs by the end of 2010?

3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.

Oh. Bummer. Okay, so the situation’s really bad, but do we really need another stimulus package? Martin Feldstein, professor of economics at Harvard, has looked at the numbers and concluded that yes, we do. His article’s worth a read but I am nothing if not a prolific summariser, so here’s the cliff notes version, which includes the “things Feldstein doesn’t say because he forgets we’re not all economists”:

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Europe’s recession in numbers: If you like your economic data in jazzy form, then you’ll love this interactive map from Dutch newspaper, NRC Handelsblad.

Political intrigue in Germany ahead of September’s elections.  Will Angela Merkel be able to free herself from the constraints of the Grand Coalition?  Her personal popularity suggests so, but it’s not clear whether this will spill over into unequivocal support for her Christian Democrats.

In the context of the ongoing rants at business news channel CNBC over Obama’s economic policies, Daniel de Groot at Open Left links to a fascinating Pew poll (from October) that compares how well-informed various Americans are depending on where they get their information from.  Some obvious findings (doing well, the New Yorker and the BBC; doing badly, Fox News and religious radio), but also some surprises (ESPN outpolls CNN, for example).  And take pride: a whole 28% of Americans can name the British PM.                    photo credit: holger doelle

Also from Open Left, it had been taken for granted that party identification was in inexorable decline, but has Obama (or indeed, Bush) stemmed the tide of this phenomenon, and set Democrats on a long-term upward trajectory?  Sure looks like it.

Hillary Rodham Clinton’s State Department has entered the blogosphere.  Some good catch-up clips from her recent travels in Europe and the Middle East (a visit that serves as the prologue to President Obama’s visit next month).  The FT’s Brussels Blog reports on the masterfully executed political strategy which was her visit to the European Parliament.

photo credit: carf

“Lexington”, who writes the Economist’s weekly column on America, now has his own blog.  This will be the Economist’s second blog on American politics, the other being the long-running Democracy in America.  Slightly off topic perhaps, the latter yesterday considered the nefarious consequences of British visa restrictions (which I discussed briefly last week) on… clowns.

Talking of the Economist, there have been a few articles about friendship groups and social networks recently, but for my money, this article rises above the pack.  Check out “Primates on Facebook: even online, the neocortex is the limit“, and ponder whether you have enough friends to surpass the “Dunbar number”.

One of the oddest things about our political system is that, in all likelihood, the broad centre-left of Labour and Lib-Dem will top 50% in next year’s election, but it looks pretty certain that a Tory government will be returned.  With this in mind, and allusions to the 80s along the lines of my own Thatcher rant, Polly Toynbee eyes electoral reform.

And finally… Andrew Sullivan links to a welcome if unusually frank expression of opinion by a British PM on US politics: Gordon Brown on California’s homophobic proposition 8.

photo credit: kiki99

I have a quick question…

Today the Bank of England announced that, along with slashing interest rates to a new low of 0.5%, they were also going to engage in something called “quantitative easing”, a rather unconventional tool of monetary policy that the Americans have been using for some time. What the hell is quantitative easing, I hear you ask? Well it’s actually fairly simple. The Bank of England simply, uh, invents some new money out of thin air, then uses that to buy up things like government bonds and the assets of other banks; the idea being that by doing this there’ll be lots of cash flowing round which will help to kickstart the economy. Of course, this only benefits said economy if the banks which are getting all this new cash use it to start lending again rather than just hoarding it in their reserves. And that’s a big if… Oh, and then there’s the fact that Britian’s never really used quantitative easing before. So we don’t know when it will work or, indeed, if it will work at all.

So here’s my question. Instead of making lots of money to go to the banks – who may not even use it in the way we want – why does the government not simply give a massive pay-out to the general public? Sure, some people will hoard their share but most people will spend it – especially the poor and the lower middle class who are being squeezed hardest by the recession. People have loans to pay off after all – and in this way it would directly help the banks as well. And it’s got to be better than just crossing your fingers and hoping that the stricken banking giants will start spending and lending again.

Over in the US, the Federal Reserve has been playing around with quantitative easing for months now, with mixed and uncertain results. But there’s also been a massive $800 billion stimulus package which includes tax cuts for the poor and middle class, higher benefits for the unemployed and other provisions that provide relief to the people being hardest hit by the recession.

So why, here in Britain, do we only have an eye for pumping the banks full of cash?

Answers in the mail, please.

On Tuesday night I was watching Channel 4 news when they aired an interview with Wall Street “legend” Jim Rogers, who the reporter described as “one of the world’s leading financiers” . The build-up to the interview was interesting:  Rogers, it was ominously announced, thinks the economic rescue plans being put forward by Gordon Brown and Barack Obama are “ludicrous and insane” and that “the politicians could be leading us into another Great Depression”.

Well you can imagine my surprise at hearing this, given that I was under the impression that the deficit-spending, government-stimulus strategy being adopted by leaders like Obama was meant to stop another Great Depression, not start one. If I’d been drinking coffee, you can be sure that I’d still be wiping it off the TV instead of writing this. But I thought I’d see what Rogers had to say before coming to judgement on the man. Big mistake!

Analysis and conclusions come over the fold.

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Okay, so here’s an interesting ethical question to wrap your head around.

photo credit: sskennel

Let’s say you’re the US Secretary of State and you’re visiting China. Let’s also say your visit comes at a time when America is facing a serious recession and so desperately needs China to keep buying American debt. Do you:

a) Engage in a forceful dialogue with China over the many human rights abuses it either carries out itself or supports around the world via its financial dealings, even though this might sour China’s commitment to buying up US debt and thus further destabilise – or even crash – the entire global economy? Or…

b) Decide that the stability of America’s economy is the first priority given the current global economic crisis, even though this lets China off the hook for its horrendous human rights record?

Not easy, is it?

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From the World This Weekend, news that the government is considering bailing out Private Finance Initiative projects (listen again). As Vince Cable from the traditionally PFI-sceptical Lib Dems pointed out, this would, even more so than the existing arrangements, transfer virtually all the risks to the government and all the benefits to the private companies (Serco, Capita, etc.) who run the scheme. Even the Tories are jumping ship, with their man on the programme (didn’t catch his name) saying that the government should reconsider more traditional avenues of funding.

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I’m not going to post every article I think is good, but this article by Steven Pearlstein, Business Columnist for the WashingtonPost is a king among among articles. Read it here.

photo credit: jmtimages

Right now, Obama’s struggle with congressional Republicans feels a bit like a classic movie with the new sheriff. You know, the new friendly Sheriff comes into town, he’s polite, courteous almost to a fault, he tries to be friends, but instead all the powers regard him as a pushover.  They overreach, treat him with contempt, and carry on their old bad habits.

You see, Obama came into Washington after sweeping up the nation with a campaign of hope and a new direction, he promised bipartisanship – dined with conservative pundits, he had a cocktail party with congressional leaders from both sides, he backed this up with more meetings and urged both sides to find some common ground. In return the House Republicans delivered a stunning zero votes, zero, not one house Republican thought the necessity of the stimulus outweighed the cons.

That’s one punch to the face but hey, it might take these guys some time to get used to the new sheriff  and the House is more partisan anyway. The Senate, is the more measured and balance chamber, the wise musings of  men committed to the good of America regardless of party….

But wait, Senate Republicans  bemoan the lack of tax cuts, they want tax cuts to have close to  1:1 ratio in the stimulus.

TAX CUTS! Talk about a broken record.  Still our Sheriff labours on hoping that the Senate can get their act together, probably at this point casting a glance at Minnesota and the devoted public servant that is Norm  Coleman. Who, having no chance of winning has worked tirelessly to ensure the people of Minnesota stay as unrepresented for as long as possible (FiveThirtyEight has the latest here).  Obama labours on, surely they see the danger the US economy is in, surely they must see how a stimulus could work? Heck, even many of their own back it; even devout pork-fighter Palin (couldn’t resist) backs it.

But instead they delay and propose pointless alternatives that need to be cleared. Then, perhaps the final straw, they start pushing around his deputy, Hilda Solis, not once but twice. Nobody, but nobody should pick on the deputy. Oh, and to add insult to injury, guess who’s sniping from the sidelines?

Obama had even given some advance notice – a polite warning shot: ” I won” he noted, as they bemoaned his stimulus. He pointed out his electoral landslide, which in no small part was a vote on the economy,  a landslide that swept many of these Republican Senators states. But they didn’t listen.

Then the fightback begins.  With support from the White House, tired of the delays in Solis’ confirmation hearings, Unions and Hispanic support groups are pushing back. This is followed by the big gun, an open asault on the lunacy of the Republicans, to get the Bill passed.

The Result: This: essentially a minor victory for Republicans who not only trim down spending in areas such as education and science (both vital to the economy and jobs), but get to keep their taxes.

Hopefully our Sheriff has learnt from this experience, as Ed pointed out in an earlier post, there is no point meeting someone half way when their starting point is a terrible idea. They wanted tax cuts, Obama’s Bill actually started with tax cuts, but Republicans then sought to massively expand on the tax cuts, (claiming the whole bill was spending and framing it so by their huge presence in the media). Obama, remember, has also promised not to directly repeal the Bush super tax cuts, in light of the recession.

So despite effectively having had two rounds of tax cuts for free, receiving an electoral hammering and facing a President with exceptional popularity, Republicans defiantly watered down the parts of the stimulus which would actually stimulate the economy and demanded more tax cuts to boot.

He’s got a bloody nose for sure, Nate Silver’s excellent article underlines the cost to Obama of failing to sell his plan (his own punches were too late). But Obama shouldn’t give up on bipartisanship.  He probably got skinned in the first round, but he’s got brilliant media strategists of his own.  Next time he needs to get out early to frame the debate and give Republicans less room for manoeuvre.

photo credit: fabbio

A quick thought on Wall Street bonuses, given that they’re once again a source of contention following Obama’s angry remarks last week.  There seems to be a sort of circular argument going on between Wall Street and, well, everyone else.  We cry: a bonus is for people who did good! Wall street responds: You don’t understand, that’s not how a bonus works.  We protest: But it’s called a bonus! And so on…

The best way to think of the corporate practice of bonus-giving is to use the analogy of tipping a waiter.  Tipping no doubt started off life as an occasional reward to the waiter for actual good service.  But once the custom caught on, I imagine people found themselves tipping more frequently – after all, unless the waiter pours your soup onto your lap, most waiter-customer exchanges are of the friendly variety (Michael Winner excluded). But since everyone was now tipping, really good service had to be rewarded with a higher scale of tips. At this point, a basic level of gratuity would have morphed into social custom – so that to neglect to leave a tip without explicit bad service would be looked down upon. Hot on the heels of social custom would be the internalisation of gratuities by the restuarant itself, so the waiters start to depend on their tips – by withholding them you are effectively reducing their “salary”.  Eventually we get to where we are today – mandatory 10% tips in London, 15% in New York. To reward particularly good service you’re talking about 20-25% . Non tippers are ostracised, questioned by waiters, blackballed by restuarants.

At this point,  the only way to break the cycle is to round up a bunch of customers and get them all to start tipping for quality, not necessity. But no-one wants to do this because no-one wants to be the first one to face the consequences of breaking the custom, and besides they don’t want to punish the waiters who now depend on the tips. In any event, even though they may moan about it, they still think of it as some kind of reward system – the good are rewarded, even though everyone’s good.

And so it is for wall street bonuses.

Tune in next time for more  extended analogies!