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April 2009


Geoff Dyer: / Asia-Pacific - China agrees on need for co-operation: The meeting on Wednesday between Barack Obama and Hu Jintao, his Chinese counterpart, on the sidelines of the G20 summit had been described by some as “the G2” and marked the first encounter between the two men. During the meeting Mr Hu stressed China’s commitment to strengthen macro-economic control and expand domestic demand, the White House said. The two leaders agreed to work together to renew world economic growth, strengthen the financial system and establish a “strategic and economic dialogue” group that would first meet in Washington later this year. The White House also announced that Mr Obama would visit China in the second half of the year....

While talk of an emerging “G2” ignores the increasingly multilateral basis of financial diplomacy, it does reflect the reality that on a growing range of international issues, little can happen without agreement between the US and China.... The more assertive stance also reflects anger building in China about criticism that its large current account surplus and reserves helped create the crisis and the realisation that its huge holdings of US bonds give it little direct leverage over US policy. “In my 16 years of covering China I have never seen the country approach an international forum in such a proactive way,” says Dong Tao, economist at Credit Suisse. “China has traditionally been passive on the international stage, being a listener rather than an opinion leader, but this time it’s different. China wants to make sure [its] voice is being heard.”

On the IMF issue, China has been under pressure from the US and the UK to make a substantial contribution to boosting the Fund’s coffers, similar to the $100bn already pledged by Japan and the European Union. China initially pushed back strongly against the idea, arguing that it was still a poor country. Yet over the past two weeks the Chinese line has softened somewhat, prompting speculation that it will inject substantial new funding. However, Chinese officials have also made clear that their condition is accelerated reform of the IMF to boost China’s voting rights. More-over, Hu Xiaolian, deputy governor of the central bank, said last week that a quicker way for the IMF to raise new funds might be for it to issue bonds that China and other countries would buy...

Future Inflation: The Least of Our Worries

Ryan Avent:

The Bellows » Inflation: Bring It On: We need not worry about hyperinflation. Or rather, in a world where hyperinflation is a real possibility, hyperinflation is the last thing we’d be worrying about. There are certainly circumstances under which America could face uncomfortably high inflation down the road, the result of which would most likely be Fed tightening and a painful double-dip recession. But there are two key points to be made about this.

One is that “uncomfortably high” given present conditions is pretty darn high. In the midst of deep recession, inflation isn’t nearly as nasty as it might otherwise be. For one thing, when dollars are getting weaker people don’t want to hold dollars, and so they spend them, which is a good way to make a dent in the shortfall in demand. For another, inflation will help housing markets clear. And for another, a weaker dollar should goose American exports.

The second, and related, point is that inflation is one of many concerns that we face at the moment. Fed independence is a big issue, and 20% annual inflation is something we’d prefer to avoid, but so is, say, a 6% contraction in output. I’d love for Congress to allocate all the necessary funds and then turn around and take the necessary steps to rein in the deficit, but given actual political constraints I’m extremely glad the Fed has done what it’s done — I prefer to see some action appropriate to the scale of the downturn taken and roll the dice with inflation. As Yglesias wrote earlier today:

Talking about a different issue last week, I heard Tyler Cowen forcefully make the point that you have to think of the political constraints as a real policy consideration.

Another way to think about this is that maybe all the folks worried about inflation should instead focus their ire on the supermajoritarian rules constraining Senate action.

Washington Post Crashed-and-Burned Watch

Republicans lie, all the time, about everything. Even those whom Barack Obama reaches out to and asks to be members of his cabinet.

Steve Benen:

The Washington Monthly: THERE'S NO SUCH THING AS A 'LIGHT-SWITCH TAX'.... In an apparent effort to be an even more shameless hack, Sen. Judd Gregg (R-N.H.) argues in a Washington Post op-ed today that "all American families will get stuck with a new 'light-switch tax' on electricity bills that is in the president's budget."

It's not just Gregg. While President Obama cut taxes for the vast majority of Americans, a standard Republican talking point is that Obama is also raising taxes on everyone who uses electricity. The new GOP catch phrase popped up about a week ago, when the House Republican Conference said in a press release that the administration supports "a light switch tax that would cost every American household $3,128 a year."

As is too often the case, the difference between Republican rhetoric and reality is overwhelming.

As Brian Beutler explained, "There is, of course, no such tax in the president's proposal or the budget resolution, and nor could there be. Obama's proposal contemplates revenue from a cap-and-trade bill, and there is a deficit neutral reserve fund for future climate change legislation in the resolution, but even that section was amended last night to provide that any increased energy costs would be offset by cap-and-trade revenue."

PolitiFact also scrutinized the Republican claim and described it as a "pants-on-fire" kind of lie.

"It's just wrong," said John Reilly, an energy, environmental and agricultural economist at M.I.T. and one of the authors of the report [cited by congressional Republicans]. "It's wrong in so many ways it's hard to begin." [...]

The tax might push the price of carbon-based fuels up a bit, but other results of a cap-and-trade program, such as increased conservation and more competition from other fuel sources, would put downward pressure on prices. Moreover, consumers would get some of the tax back from the government in some form.

The report did include an estimate of the net cost to individuals, called the "welfare" cost. It would be $30.89 per person in 2015, or $79 per family if you use the same average household size the Republicans used of 2.56 people.

The cost would grow over time as the program ramps up, but the average annual cost over time in today's dollars -- that is, the "average annual net present value cost" -- is still just $85 per person, Reilly said. That would be $215.05 per household.

A far cry from $3,128. And that isn't the only inaccuracy in the claim.

The Republican claim isn't just an error or a mistake, and it's not a subjective question open to interpretation. The GOP talking point is an obvious and transparent lie.

I'm not optimistic, but the Washington Post, which ran Gregg's blatant falsehood, should do the responsible thing here. It was wrong to publish the lie, but the paper now has the opportunity to publish a correction so readers are at least aware of the fact that the New Hampshire Republican is trying to deceive them.

G-20 Meeting Forecast

  1. Obama will tell the G-20 leaders what they ought to do.
  2. They will complain.
  3. They will do about half of it.
  4. That they do half of it will be an extraordinarily good outcome--the best episode of international policy coordination since Bretton Woods itself.
  5. Will them doing half of what they ought to do be good enough? Ah, that is the question

If we judge the Obama administration based on performance relative to the difficulty of the dive, I think their scores are good: 9.7, 9.3, 8.7, 9.1, and a 4.4 from the East German judge...

Martin Wolf Is Such a Cheerful Polyanna!

He writes:

Why G20 leaders will fail to deal with the big challenge: The summit of the Group of 20 leading high-income and emerging countries in London on Thursday seems set to achieve progress. But achievement must be measured not just against past performances, but against “the fierce urgency of now”. Unfortunately, it will come up short.

The Organisation for Economic Co-operation and Development now forecasts a 4.3 per cent contraction in the economies of advanced countries this year, followed by stagnation in 2010. In advanced member countries, joblessness may rise by 25m by 2010. Meanwhile, the International Monetary Fund forecasts that the global economy will shrink by between 0.5 and 1 per cent this year. This would be an increase in the “output gap” (gap between actual and potential output) of some 4 per cent.

Will the G20 rise to  these exceptional challenges? No, is the answer. What is needed is a large increase both in aggregate demand and a shift in its distribution, away from chronic deficit countries, towards surplus ones. On both points, progress will be far too limited....

In last week’s FT interview with Angela Merkel, the German chancellor said that: “The German economy is very reliant on exports, and this is not something you can change in two years.” Moreover, “It is not something we even want to change.” To paraphrase: “The rest of the world needs to find a way of absorbing our excess supply, but sustainably, please.” Yet what happens if that cannot be achieved for the excess potential supply of all surplus countries together? In 2007, the three countries ran current account surpluses of $835bn (€629bn, £585bn). Logically, counterpart deficit countries must spend that much more than their incomes. Yet today deficit countries have run out of willing and creditworthy private borrowers.

That change is what this crisis is all about, as the charts show. Between 2007 and 2009, the crisis-hit private sectors of the US, UK and Spain will, on these forecasts, shift their financial balances (the difference between their incomes and expenditures) massively towards surplus, as savings rise and spending is cut. In Spain, the shift is forecast to be 11.7 per cent of GDP. The main offsets in these deficit countries will be huge jumps in fiscal deficits, although the current account deficits are also, inevitably, shrinking.

Surplus countries, which relied on the private sectors of deficit countries to do their irresponsible borrowing for them, show a very different pattern: their private sector [savings-investment] balances will change rather little and, in all cases, will be in large surplus throughout: big current account surpluses nearly always mean private sector excess savings. But, as their external surpluses shrink, fiscal deficits will grow....

This is not a path towards a durable exit from the crisis. It is a path on which the fiscal deficits needed to offset persistent current account deficits, and collapsing private spending in external deficit countries, continue indefinitely. Unless and until surplus countries recognise that this cannot continue, no durable escape from the crisis will be achieved. Understandably, but foolishly, they are unwilling to do so.

So what is to be done? That must be a central agenda item of the next G20 summit. The world economy cannot be safely balanced by encouraging a relatively small number of countries to spend themselves into bankruptcy. The answer lies partly in changing the policies of surplus countries. But it lies as much in rethinking the international monetary system. The case for sizeable and ongoing allocations of special drawing rights – the IMF’s reserve asset – is powerful, as, among others, Zhou Xiaochuan, governor of the People’s Bank of China, has argued in a fascinating recent paper. I hope soon to return to this huge challenge and opportunity. In the meantime, the G20 summit is largely dealing with the immediate symptoms of the illness. Finding a longer-term cure for chronic global excess supply still lies ahead.


I knew in the back of my mind that this was going on. But I had never seen these charts before:

De-imbalancing the globe.

Jeebus save us! This is a $700 billion negative shock to foreign exports.

Republican Circular Firing Squad of Flying Attack Monkeys, Part CCCLIX

Hal Sevugun:

You say Budget, I say....

GOP Disarray, House Version: Paul Ryan versus John Boehner on What Constitutes a Budget: Please find below our response to Rep. Paul Ryan saying this morning that the House GOP "budget" released last week was a "marketing document" and that there was a "misimpression given that that was [the GOP] budget alternative":

Rep. Paul Ryan said this morning on MSNBC that the House GOP budget released last week was a only 'marketing document.' Maybe Rep. Ryan should check in with House Republican Leader John Boehner who went to great lengths last week, in front of Rep. Ryan, to say it was a budget - all 19, numberless pages of it. Even if you accept Ryan's description of last week's House GOP 'budget' as simply a 'marketing document,' it was the worst attempt at marketing since New Coke and doesn't give us a lot of hope for the 'budget' they plan to introduce today," says DNC spokesman Hari Sevugan.

You can see Rep. Ryan's comments along with Leader Boehner's comments introducing the GOP "budget" last week HERE. Incidentally, that guy over Rep. Boehner's right shoulder as he's giving what Rep. Ryan says is the "misimpression... that that was [the GOP] budget alternative" - that's Paul Ryan.

Senate Banking Committee Hearing March 31, 2009: Lessons from the New Deal

Mark Thoma finds the URL:

The Senate committee for Banking, Housing, and Urban Affairs held a hearing today on "Lessons from the New Deal": Panel 1: The Hon. Christina D. Romer, Chair, President's Council of Economic Advisors. Panel 2: Dr. James K. Galbraith, University of Texas at Austin; Dr. J. Bradford DeLong, University of California at Berkeley; Dr. Allan M. Winkler, Miami (Ohio) University; Dr. Lee E. Ohanian, University of California at Los Angeles.