That Eighties show
Donald Trump’s attempt at Reaganomics will prove costlier than the original
Nov 19th 2016 | From the print edition
FOR the moment, the policy priorities of the Trump administration-in-waiting are a basket of unknowables. Plans to scrap Obamacare or re-deregulate America’s financial sector, though dear to Republican hearts, are easier to champion on the campaign stump than to implement. A step away from globalism—Donald Trump’s most consistent campaign theme—could make for an awkward opening gambit given pockets of Republican resistance to overt protectionism. Tax cuts and infrastructure spending, on the other hand, look like an easy and unifying win for the new administration. And indeed, market moves since Mr Trump’s victory seem to imply an expectation of a Ronald Reaganesque turn in American fiscal policy; government-bond yields have risen, seemingly in expectation of bigger deficits, faster growth and higher inflation. Yet any resemblance that Mr Trump’s plans may bear to Reaganomics is as much a cause for concern as for optimism.
The president-elect’s tax proposals are easily the boldest since Reagan’s. Mr Trump’s plan would slash the highest marginal income-tax rates, cut rates of tax on corporate income and on capital gains, and eliminate federal inheritance and gift taxes entirely. According to an analysis by the Tax Policy Centre, a think-tank, the plan would reduce annual federal-tax revenue by about 4% of GDP. In contrast, in the first four years after its implementation the tax reform act of 1981 reduced annual revenue by almost 3% of GDP. At the same time, Mr Trump seems keen on new government spending; his transition-team website refers to $550bn in desired new infrastructure investment. Even if the legislation to emerge from Congress is more moderate, as seems likely, a big dose of tax cuts and new spending appears to be in the offing.
Stimulus would have its benefits. Higher inflation would be a welcome change from the spectre of deflation that until recently stalked the rich world. Some economists reckon that running the economy “hot”, to the extent that demand outstrips its productive potential, could nurture growth in America’s economic capacity: by bringing workers on the margins of the labour force back into employment, for example. Yet a Reaganomics rerun would almost certainly do more harm than good. The experience of the 1980s suggests three big causes for concern.
The first is financial instability. American interest rates in the 1980s were remarkably high: thanks initially to Paul Volcker’s efforts to bring down inflation, and later on to faster American growth and heavy government borrowing (see chart). High interest rates attracted money from abroad, pushing up the value of the dollar: it rose, on a trade-weighted basis, by roughly 40% from 1980 to 1985. As a result, developing economies, including many in Latin America, found themselves with unpayable dollar-denominated loans. Sovereign-debt woes crippled the affected countries’ economies; meanwhile, debt defaults and restructurings saddled big American banks with large losses, pushing some to the brink of insolvency. Today, most emerging economies hold far less dollar-denominated public debt. Yet vulnerabilities remain. The Federal Reserve has prepared markets for a gradual pace of monetary tightening. Should higher inflation convince the Fed that more interest-rate hikes are needed sooner, many investors in emerging markets could be caught off guard. A bout of chaotic capital flight could threaten shakier banks or induce governments to adopt capital controls. America, which eventually intervened to help manage the Latin American debt crisis, will probably be slower to lend a hand under Mr Trump.
Trumped-up trickle-down economics
American generosity might be in especially short supply as a result of a second side-effect of Trumpian Reaganomics. As the dollar soared in the early 1980s, America’s current account flipped from a small surplus into sizeable deficit. American firms howled. Efforts early in the 1980s to cajole trading partners into limiting exports gave way to more serious interventions later on. In 1985 James Baker, then treasury secretary, negotiated the Plaza accord with Britain, France, Japan and West Germany to bring down the value of the dollar. And in 1987 Reagan slapped economic sanctions on Japan for its failure to meet the terms of an agreement on trade in semiconductors.
Mr Trump, no instinctive free-trader, might face a similar dynamic. Faster growth and higher interest rates might attract foreign capital and place upward pressure on the dollar, which has indeed been rising since the election. That will help exporters to America and hamper a manufacturing revival in the struggling towns that helped Mr Trump win. In fact, the Mexican peso has fallen by about 10% against the dollar since the election, boosting the competitiveness of Mexican firms relative to their American counterparts. Yet Mr Trump will find responding to these shifts to be trickier than did Reagan. Sprawling supply-chains mean that punitive tariffs are less obviously useful to domestic firms than they once were. A battle over exchange rates between America and China could prove far more dangerous, both economically and geopolitically, than Mr Baker’s negotiations.
Perhaps most important is a third lesson: that the boost to growth provided by tax cuts and liberalisation need not be spread evenly across the economy. Prescriptions which made sense a generation ago look inappropriate now. Top marginal tax rates are far lower than they were then; further cuts may deliver a smaller boost to growth as a result. Meanwhile, inequality is far higher now than it was in the early 1980s; slashing tax rates on the rich while unravelling recent financial regulation could push economic divisions to unprecedented, politically toxic levels. The global economy could use more fiscal stimulus. A raft of regressive tax cuts from a protectionist-minded American administration is, to put it mildly, a risky way to provide it.
Rethinking central bank independence
Nov 17th 2016, 12:54 BY BUTTONWOOD
CENTRAL bankers are under fire. In America, President-elect Donald Trump said that the Federal Reserve chair Janet Yellen should be "ashamed of herself" for keeping rates too low; in Britain, Mark Carney of the Bank of England has been criticised for his views on the economic risks of Brexit; and in Europe, Mario Draghi has faced attacks from critics in Germany (for being too lax) and Greece (for being too tight).
In a new paper Ed Balls, who played an influential role in making the Bank of England independent, has teamed up with James Howat and Anna Stansbury to try to think through the role and wider responsibilities of the central bank. It is very much worth a read and here are my first thoughts (colleagues will doubtless chip in later).
As the paper points out, central bank power has increased in the wake of the 2007-08 crisis, extending well beyond the narrow pre-crisis focus on using interest rate policy to meet inflation targets. But the worry is that
Absolutist interpretations of complete central bank independence may both undermine the pursuit of new central bank objectives and fray the political support that currently exists for central bank autonomy in their core monetary policy function
This blogger has had a few pops at central banks himself, largely on the grounds that they ignored the financial risks pre-crisis and that post-crisis, they have failed to meet their inflation targets, while quantitative easing (QE) has had a distorting effect on markets. By passing power to unelected technocrats, politicians may be highlighting their own impotence and adding to voter cynicism. But in defence of central banks, they have used the weapons they had available. The failure has been on the part of elected governments. Some could have used fiscal policy to support expansion (in the US and Germany, in particular) and used tax and benefit policies to offset the redistributive consequences of QE.
A lot of the current criticism of central banks assumes that they had some hidden political agenda (to support the election of Hillary Clinton or to warn voters off Brexit) behind their policy shifts. That is nonsense, in my view. In a low growth, low inflation world, central banks have had little option but to keep policy loose; many of those that tried to tighten policy have been forced to retreat. And central banks tend to reflect the consensus view of economists which was that Brexit would be bad news (those who think the consensus view has been proved wrong might note that the government has yet even to start the exit process). In short, central banks may have made mistakes but they are honest mistakes. In a sense, central banks are being made scapegoats for others' failures.
As the Balls paper points out, in the run-up to the crisis, most economists thought central bank independence was an unabashedly good thing. That stemmed from the experience of the 1960s and 1970s when inflation got out of hand. When politicians played a role in setting interest rates, they were tempted to use policy to manage the electoral cycle; easing ahead of the polls. Conquering inflation required a change in public expectations. Independent central banks could focus on the narrow issue of inflation, without the need to worry about electoral unpopularity. This made their commitment to control inflation credible. And the early evidence suggested that independence did help bring inflation down.
But the crisis showed there was a problem at the heart of policy; a credit bubble built up but, with inflation quiescent, central banks were passive, As the paper notes
The crisis demonstrated that a focus on price stability alone is too narrow: effective macroeconomic policy cannot ignore the financial sector, and requires coordination between monetary and fiscal policy when at the zero lower bound. New trade-offs have been revealed between stable inflation, full employment and financial stability.
What’s more, the crisis demonstrated that the modern complex financial system is vulnerable to systemic risks that may be – and were – missed by micro-prudential regulators focused on specific institutions. Such risks might build up over time: for example herding behaviour can lead to pro-cyclical investment strategies.
In the course of the crisis, central banks turned on the liquidity taps as the lender of last resort. But in the light of public anger at the banking sector that caused the crisis, this looked like favourable treatment. As the paper says
Contrary to Bagehot, they lent at subsidised rates, on the basis of hard-to-value collateral and to a wide range of counterparties. In fact, some central banks even acted as market-makers-of-last-resort.
This raises the tricky issue of whether central banks should be in charge of both monetary policy and of financial supervision. In Britain, the role was split before the crisis but has been (partly) reunited. The paper grapples with this issue. Dividing up responsibility avoids groupthink or regulatory capture (constant dealing with the people they regulate may cause a central bank to become too sympathetic); on the other hand, it can lead to uncoordinated policy.
The authors attempt to square this circle by suggesting that
The systemic risk oversight body should include the central bank, other regulators and the government. This diverse membership will minimise the dangers of group think and help coordinate responses to systemic risks. The government should chair this body, giving it the power to set the agenda and veto recommendations.
This has the virtue of democratic accountability but at the risk that politicians fail to crack down on financial bubbles for fear of offending, say, homeowners. So there would be a separate macro-prudential policy body that would implement decisions on, say, loan-to-value ratios
While the government-led systemic risk body should set financial stability priorities and decide on the perimeter of permissible tools, the macro-prudential policy-making body should be operationally independent from government. This division of labour ensures that the goals of financial stability policy are decided by politicians, which will provide overarching political legitimacy for macro-prudential policy while protecting its implementation from short-term political pressures.
Maybe this would work. But that leaves the separate issue of who should look at banks on a day-to-day basis - microprudential policy as it is called. Here the authors say that
The micro-prudential regulator should be operationally independent. But given that the case is finely balanced, we are neutral on whether the central bank or a different body should be responsible for bank supervision. The appropriate decision may depend on each country’s political and institutional context.
This starts to look like a complex and confusing system where it may not be clear where accountability lies.
What about monetary policy? The central banks may have staved off a depression but they have not generated pre-crisis growth levels and rates appear stuck at the zero lower bound. Perhaps that was the best they can do; the engines of economic growth are productivity and labour force changes, neither of which central banks can do much to influence. Oddly, it might seem. the Anglo-Saxon critics of central bank policy seem to think that central banks have kept interest rates too low, even though inflation has tended to be below target. The underlying rationale for this critique is that low rates have enabled government to finance big deficits and thus kept the size of the state larger than the critics would like.
There is something to this point. Central bank independence was a policy designed to deal with inflation that was too high, not too low. The idea was to act as a check on irresponsible governments. But in the current circumstances, central bank policy seems quite convenient; what elected politician would take the unpopular step of raising taxes or cutting spending and appease the vigilantes in the bond markets when a helpful central bank is willing to buy its debts?
That said, fiscal policy has generally been tight in recent years in most countries (governments have been trying to take demand out of their economies) in a way that has counteracted central bank attempts to stimulate. So the authors make their most controversial proposal - when interest rates are close to zero, monetary and fiscal policy should be coordinated.
A coordination mechanism should be established that respects the following three principles. It should be triggered by the central bank, it should protect democratic control over fiscal policy and it should be limited to the zero lower bound. An open letter system, in which the central bank outlines its views about the appropriate stance of fiscal policy at times when interest rates are below a pre-defined level close to the zero lower bound, would meet these principles.
On its own merits, this sounds entirely sensible. But if you think central banks are in the political firing line now, what would happen if they started commenting on fiscal policy, particularly close to an election? Imagine if Ms Yellen were to advise the Republicans against tax cuts for the rich?
Anyone with an interest in monetary policy should read this excellent paper. But many will find reasons to disagree with it.
Brexit means...a lot of complex trade decisions
Nov 15th 2016, 17:25 BY BUTTONWOOD
POLITICIANS campaign in soundbites but reality deals in awkward paragraphs. For all the sloganeering (Brexit means Brexit) and the prevarication, the British government must finally decide what kind of trade-offs it is willing to accept when it leaves the European Union. The UK trade policy observatory at the University of Sussex has an excellent new paper out on the choices facing the country, which was the subject of a lunchtime seminar today.
The British government seems to have four red lines. It wants to stop free movement of labour; to be allowed to pursue an independent trade policy; not to contribute to the EU Budget; and to break away from legal oversight by the European Court of Justice. (All of these can be summed up by the slogan "taking back control"). The EU's sole red line seems to be that Britain cannot benefit from "cherry picking"—for example, benefiting from membership of the single market in terms of goods trade, but not allowing free labour movement.
To understand the trade-offs, we must first understand the terms. The single market is an idea that Britain originally pushed for—a trading area where the regulations are harmonised so that goods and services can be traded on an interchangeable basis. Without it, there is the danger that trade is restricted because, for example, Slovenia might impose rules on car design which mean that it effectively excludes vehicles made in other EU countries. But in order to make the single market work, there have to be common rules; and the imposition of those rules is something that British voters seemed to rebel against. A further confusion is between access and membership. Every country in the world, even North Korea, has access to the single market; it is membership that makes it easier for companies to sell their goods.
Then there is a customs union. This simply means a free trade area where all members have common tariffs against goods from outside. Again, such a deal is efficient but prevents member countries from agreeing separate deals with other countries (as Britain wants to do). Then there is the European Economic Area (EEA) which is a peculiar type of free trade agreement, operated by just Norway, Iceland and Lichtenstein. This gives some freedom to negotiate deals with countries outside the EU but requires accepting freedom of movement and budget contributions. Then, there is falling back on World Trade Organisation (WTO) rules; these would involve trading with the EU but with tariffs imposed on goods and with possible barriers to trade in services.
Britain's red lines mean that being part of the EEA or the customs union would be impossible. And falling back on WTO membership would be economically damaging. So the hope seems to be, as Brexiteers have argued, that Britain could have a free trade agreement similar to those signed (just) with Canada or South Korea.
But that is where the trickiest bit of the negotiations would occur because of the EU's red line; it does not want Britain to benefit from a cherry-picked deal that might encourage other countries to follow the path to the exit.
A free trade agreement would avoid tariffs but still require agreement on rules of origin. These would require British manufacturers to show that more than 60% of the goods they export to the EU were made in their home country—tricky in a world of global value chains where cars, for example, use a lot of imported components. It might also involve a mutual recognition agreement, so that EU countries could accept that Britain's standards for testing and certification. Without such agreements, British goods could face barriers just as steep as those deriving from tariffs. But here is the rub. If Britain agreed to mutual enforcement of standards with the EU, it could not then agree to sign a separate deal with other countries (such as China) involving separate standards.
Perhaps Britain could do a deal in which certain sectors were effectively part of the Customs Union, as the government seems to have promised Nissan? Such a deal would have to be ratified by all other EU members, making it hostage to one intransigent Parliament.
Worst of all, Canada's free trade deal does not cover services, the area where Britain tends to have a trade surplus; 37% of Britain's services exports go to the EU. A deal that lets German cars into Britain but prevents British accountants and lawyers from selling to German clients would not be not a good one. As the paper concludes
The UK seems to be more wedded to its red lines but also risks losing more by not modifying them
All this will require a lot of patient negotiation, which seems unlikely to be completed by March 2019 when the formal date for EU exit may occur. So that may require an interim period in which Britain maintains the EU trading arrangements, including free labour movement and budget contributions. That might be economically sensible (some think Britain may choose to continue in this limbo forever). But it would be politically tricky; Theresa May would face the 2020 electorate with Britain still effectively in the EU.
留言列表
高普考補充資料 (3)
