Looking back at the G20

Returning from a week's vacation, I've been catching up on the G20 summit in Pittsburgh. I am moved, of course, by  the FT's strictures against cynicism, but one is still entitled to ask what was achieved.

Certainly, the communique is full of fine promises and commitments. The FT summarises:

They agreed to: avoid premature withdrawal of stimulus; plan their exit strategies; launch a "framework for strong, sustainable and balanced growth"; strengthen financial regulation, via reformed rules on capital adequacy and remuneration of bank employees; reform the global institutional architecture, including reallocation of quotas in the IMF; phase out fossil fuel subsidies; "bring the Doha round to a successful conclusion in 2010"; reach agreement in Copenhagen on climate change; and meet twice in 2010, first in Canada and then in South Korea.

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Signing off for a week

Financial regulation and the G20

If Mr Geithner's proposals are acted on, the global financial system will be far better protected in future. This week's summit will not budge fiscal policy, least of all in the US. All the talk about exit strategies - when and under what conditions to start withdrawing stimulus - is so much wasted breath. But bank regulation better had be strengthened, and in a closely co-ordinated way, or else governments will be leaving their countries as exposed as before to the risk of another financial crisis.

The global finance industry is in no position, yet, to mount a vigorous campaign against changes which, if they are adequate, will implicitly tax its growth. That is what higher capital requirements would do, and is precisely why they are needed. Checking the industry's expansion must be seen as an aim of policy, not an unintended consequence.

China tariffs pose needless risk...

Or so I argue in this new column for National Journal [link expires in two weeks].

The fact that the China tariffs may be legal does not refute the charge of protectionism. One of the main setbacks to liberal trade since the economic crisis began has been governments' willingness to resort to WTO-conforming trade restrictions. For instance, a country may have tariffs that are lower than the rates they have committed themselves to at the WTO -- their so-called bound tariffs. So governments often have scope to raise their tariffs for the usual bad protectionist reasons, without actually cheating...

So protectionism is sometimes legal. That does not make it good policy -- still less, as the administration pretends, an effort to uphold the ideal of "free and fair trade." Of course, the Obama White House is aware of all this. In the China tires case, it knows how safeguards are supposed to work. In reality it is making a cynical political calculation. Dressing the action up as an effort to get tough on trade cheats delights the unions -- which seem to regard most imports as unfair by definition -- and thrills Democrats, who can use a little protectionist meat thrown their way at the moment, to take their minds off the administration's equivocation on health care reform and the public option. The tire tariffs have nothing to do with upholding high standards in trade policy.

But note this excellent piece by Alan Beattie. It takes a quite different line:

The conventional wisdom in Washington is that this is a straight trade-off. Placate the labour unions on trade and get them to support Mr Obama on healthcare. Whisper it quietly, and be prepared for accusations of heresy to rain down on your head, but that might be a deal worth making.

Whether or not any such exchange is possible is unclear to anyone below grandmaster level in the perpetual three-dimensional chess game of acquiring, retaining and expending political capital that goes on in Rahm Emanuel's head. (White House officials deny a trade-off, but then they would, wouldn't they?) Yet if that is the political calculation, and if it works - two very large ifs, to be sure - it might end up being good for Americans and good for globalisation.

Actually I partly agree with Alan. If things played out this way, it would be a very good deal. Universal health care is an enormous prize and in itself the China tyres issue is small beer. I also agree with the important insight elsewhere in the column that universal health care in the US would have done more for globalisation than Nafta. Yes, absolutely. The problem is the linkage. How plausible is this trade-off in the present case?

It's true that the unions are unhappy with the healthcare compromise that Obama is signalling he might accept. I see the connection, and refer to it myself in my piece. Still I cannot believe that they will oppose healthcare reform in the end. It is odd, surely, to say that the unions have to be bribed to accept a much stronger economy-wide safety net (even if the strengthening falls a little short of what they want).

The main question when you are thinking about the trade-off Alan describes is whether you feed or suppress the appetite for protectionism by giving way now and then. I think you are more likely to feed it--especially if you rationalise your capitulations in ways that invite new demands. As I argue in the NJ column, Obama's biggest mistake over the China tariffs was in the way he defended them.

The future of the WTO

An interesting paper on the WTO by Uri Dadush of the Carnegie Endowment. His main conclusions:

• The WTO must adopt a more flexible approach to trade negotiations, tailored to the needs of individual countries and groups. The institution should move beyond multilateral, all-or-nothing negotiations that are bearing little fruit and find ways to leverage opportunities where liberalization is taking place.
• Though critical for the WTO's credibility and to capitalize on eight years of negotiations, a conclusion of the diluted Doha round will not negate the need for reform. Nor should discussion of reform wait until after the Doha round has been completed, it might actually encourage progress.
• A formal discussion about reform should get underway during the WTO's ministerial meeting in Geneva in November.
• The WTO is nowhere to be found in several areas of crucial concern, including food security, international financial regulation in the wake of the global financial crisis, and climate change.

Gary Hufbauer, Steve Charnovitz, and Arvind Subramanian joined Dadush to discuss the paper on Tuesday. There was broad agreement with the recommendations for the institution, but not so much on whether the Doha round was capable of being revived, or even worth reviving. (There should be a transcript here soon.)

Comments on the new US tariffs on tyres imported from China mostly agreed with the line taken in this FT editorial: the Obama administration's safeguard action was probably legal, and unlikely to start a trade war; but nonetheless wrong-headed, ill-timed (with the G20 summit coming up), and badly presented. Further comment from Subramanian at the Peterson Institute and Simon Lester at the International Economic Law and Policy blog.

Inflation hawks

To be sure, both deficit spending and the Fed's recent measures could, in theory, create inflationary pressure. But they haven't, because they've just gone to counteract the sharp decline in consumer and business activity. The government is borrowing more, but consumers and businesses are borrowing less. As for the money the Fed has been pumping through the banks, much of it hasn't actually made it into the economy; banks are keeping hundreds of billions of dollars in reserves on hand. If the definition of inflation is too many dollars chasing too few goods, the too many dollars aren't out there. In the real economy, meanwhile, worker productivity is tremendously high; wage growth is stagnant; and there's still an enormous amount of slack--capacity that's not being used and people who don't have jobs. All of these things will put a lid on price pressures for some time to come.

Then why are people afraid that inflation is about to get out of control? Because they're always afraid that inflation is about to get out of control.

Fear of inflation can be taken too far, but this is complacent. It is too soon to worry about inflation in the same way it was too soon in 2005 to be concerned about securitised mortgages and house-price bubbles. The US economy's immediate problem is indeed stagnant output, not surging prices - but you do not need extraordinary foresight to see how this could change. Monetary and fiscal policy both need to stay loose for now, but a little thought about the next big economic-policy challenge would not go amiss.

At the very least, you have to acknowledge that the Federal Reserve faces an entirely new set of problems. This is not just because the recession has been so severe, but also because its interventions during the course of this crisis have been unprecedented in range and scale.

Obama's big speech

Once again, he rose to the occasion. My overall feeling: "This is the Obama who won the election. What a superb politician he is. Where has he been on this issue for the past six months?"

He set out to talk to the country over the heads of the politicians in front of him. About time: it is public opinion he needs to bring round if healthcare reform is to succeed. In this, the occasion both helped and hindered--helped, because it permitted a style of oratory that he does brilliantly, and which could seem false in a more modest, informal setting; hindered, on the other hand, because the audience kept interrupting, getting between Obama and the country, imposing itself on the event with its frequent, fatuous, pantomime ovations.

I thought it striking that the ovations ceased during a long, seemingly heartfelt, and very effective peroration: they stopped, it seemed to me, because the audience started listening. (Nancy Pelosi even stopped grinning.) Obama invoked Ted Kennedy as part of a renewed appeal for bipartisanship, a theme he is reluctant to abandon, and did it so cleverly that Republicans were folded in and obliged to respond.

He said that meeting the challenge of healthcare reform was a test of the nation's moral character--which, in my view, it is. I found his closing words genuinely affecting. My guess is that many other independents will feel the same way. (In this, an earlier moment of boorish heckling from one Republican also helped.) At last, Obama emphasised the "health security" benefits of reform for those who already have insurance: they will not lose it; their out-of-pocket expenses will be capped. This is at least as important as the benefits to the currently uninsured.

All in all, I think he made the case for reform about as well as it could be made.

But what difference is it going to make? I wrote down three questions before the speech. Did he take charge of the process? Did he explain what "the plan" actually is? Did he settle the row over the public option? He should have done all these things already. Tonight I thought he made some progress in each case, but without answering any of the questions definitively.

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A pre-speech memo on healthcare

Barack Obama's promise to reform the US healthcare system played a big part in his campaign for the presidency. Voters responded warmly to the idea, and in principle still do: most continue to say they want the system changed. Yet barely half way through Mr Obama's first year in office, his effort to keep his promise threatens to derail his administration.

The previous attempt at comprehensive reform failed spectacularly in 1994. Bill Clinton's Democratic party then paid an awful price. The Republicans triumphed in that year's mid-term elections. The setback transformed Mr Clinton's presidency.

It was a memorable lesson, and suggests what might be at stake this time-yet few accused Mr Obama of innocence or recklessness when he vowed to revisit the issue. The climate of opinion had changed. Healthcare reform seemed more popular than ever. Interest groups once opposed to it recognised the new mood. Even before the debate began in earnest, they signalled willingness to surrender, as long as the terms were moderate.

Now, just months later, opposition to the administration's approach is building inside Mr Obama's own party. The Republicans, sensing a chance to force a crippling defeat on the new president, are ever more trenchantly opposed. Above all, independent voters are turning against the Democrats' proposals. What has gone wrong? How, if at all, can Mr Obama revive his initiative?

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Obama's make or break speech

The speech that Barack Obama will give to a joint session of Congress on Wednesday could be the most important of his presidency. Mr Obama is fighting to revive his flagging healthcare initiative. But more is at stake than that.

If the healthcare project fails, it will be a serious blow to the president's power. Mr Obama's popularity with independent voters has already fallen. He faces opposition from Republicans and anger among many of his own supporters. Pollsters are talking about a big reverse at next year's mid-term elections. On Wednesday, the success or failure of this presidency may be on the line.

The speech is a gamble, though not because Mr Obama's rhetorical powers are in doubt. More than once during last year's election campaign he used a big address to recover from setbacks and vault forward. But one wonders whether high-minded inspiration - Mr Obama's speciality - will be adequate this time.

What Bernanke has to look forward to

In this article for National Journal, I look at the task now facing Ben Bernanke at the Fed [the link expires in a fortnight].

I remember congratulating Alan Greenspan on his timing when he retired as chairman of the Federal Reserve Board in 2006. He left with a reputation for limitless, inscrutable wisdom -- and the stresses he let build up in the economy were going to be somebody else's problem. As it turned out, the crash that Greenspan's policies helped to cause was the worst since the Great Depression. So the books on Greenspan's tenure at the Fed were reopened; the man himself recanted his previous views on the economy; and his reputation was trashed, most avidly by people who had previously led the cheers.

History will not put Greenspan alongside, say, Paul Volcker on the roll of great Federal Reserve chairmen. But is such a place something that Greenspan's successor might aspire to?

Of course. Why else take the job? Ben Bernanke, just named by President Obama to a second four-year term starting in January, has had to cope with the immediate consequences of the financial crisis. He has taken the Federal Reserve into unexplored and even constitutionally dubious territory. His performance may not have been flawless, but the boldness of his interventions -- such a contrast with his quiet, scholarly demeanor -- has been amazing. And the innovation is by no means over.

I spend some time discussing David Wessel's excellent new book, In Fed We Trust. I'll post a fuller review of later this week, but in the meantime consider it recommended.