The World We’re Actually Living In

For first time in a long, long time, a Democrat is running for president and has the clear advantage on national security policy. That is not “how things are supposed to be,” and Republicans sound apoplectic about it. But there is reason President Obama is leading on national security, and it was apparent in his U.N. speech last week, which showed a president who understands that we really do live in a more complex world today, and that saying so is not a cop-out. It’s a road map. Romney, given his international business background, should understand this, but he acts instead as if he learned his foreign policy at the International House of Pancakes, where menu and architecture rarely changes. (source: Thomas L. Friedman – NYTimes – 30/09/2012)

Rather than really thinking afresh about the world, Romney has chosen instead to go with the same old G.O.P. bacon and eggs, that Democrats are toothless wimps who won’t stand up to our foes or for our values, that the Republicans are tough and that it is 1989 all over again. That is, America stands astride the globe with unrivaled power to bend the world our way, and the only thing missing is a president with “will.” The only thing missing is a president who is ready to simultaneously confront Russia, bash China, tell Iraqis we’re not leaving their country, snub the Muslim world by outsourcing our Arab-Israel policy to the prime minister of Israel, green light Israel to bomb Iran and raise the defense budget while cutting taxes and eliminating the deficit. It’s all “attitude”, without a hint at how we could possibly do all these contradictory things at once, or the simplest acknowledgment that two wars and a giant tax cut under George W. Bush has limited our ability to do even half of them.

Let’s look at the world we’re actually living in. It is a world that has become much more interdependent so that our friends failing (like Greece) can now harm us as much as our enemies threatening, and our rivals (China) collapsing can hurt us as much as their rising. It’s a world where a cheap YouTube video made by a superempowered individual can cause us more trouble than the million-dollar propaganda campaign of a superpower competitor. It is a globalized economy in which the U.S. Chamber of Commerce, America’s largest business lobby, has opposed Romney’s pledge to designate China as a currency manipulator and is pressing Congress to lift cold war trade restrictions on Russia, a country Romney has labeled America’s “No. 1 geopolitical foe”. It is a world where, at times, pulling back and focusing on rebuilding our strength at home, is the most meaningful foreign policy initiative we can undertake because when America is at its best, its institutions, schools and values, it can inspire emulation, whereas Russia and China still have to rely on transactions or bullying to get others to follow. It is still a world where the use of force, or the threat of force, against implacable foes (Iran) is required, but a world where a nudge at the right time and place can also be effective. Add it all up and it’s a world in which America will have greater responsibility (because our European and Japanese allies are now economically enfeebled) and fewer resources (because we have to cut the defense budget) to manage a more complex set of actors (because so many of the states we have to deal with now are new democracies with power emanating from their people not just one man, like Egypt, or failing states like Pakistan) where our leverage on other major powers is limited (because Russia’s massive oil and gas income gives it great independence and any war we’d want to fight in Asia we’d have to borrow the money from China).

This complexity doesn’t argue for isolationism. It argues for using our power judiciously and in a nuanced fashion. For instance, if you had listened to Mitt Romney criticizing Obama for weakness after the attack on the U.S. consulate in Benghazi, Libya, you’d have thought that, had Mitt Romney been president, he would have immediately ordered some counterstrike. But, had we done so, it would have aborted what was a much more meaningful response: Libyans themselves taking to streets under banner “Our Revolution Will Not Be Stolen” and storming the headquarters of the Islamist militias who killed the U.S. ambassador. It shows you how much this complexity can surprise you. The one area where Romney could have really challenged Obama on foreign policy was on president’s bad decision to double-down on Afghanistan. But Romney can’t, because the Republican Party wanted to triple down. So we’re having no debate about how to extricate ourselves from our biggest foreign policy mess and a cartoon debate,“I’m tough; he’s not”, about everything else. In that sense, foreign policy is a lot like domestic policy. The morning after the election, we will face huge “cliff”: how to deal with Afghanistan, Iran and Syria, without guidance from candidates or a mandate from voters. Voters will have to go with their gut about which guy has the best gut feel for navigating this world. Obama has demonstrated that he has something there. Romney has not. 

Central banks make an historic turn

When the economic history of the 21st century is written, September 2012 is likely to be recorded as a defining moment, almost as important as September 2008. This month’s historic events, Ben Bernanke’s promise to buy bonds without limit until U.S. returns to something approaching full employment, Angela Merkel’s support for ECB bond purchase plans and the Bank of Japan’s decision to accelerate greatly its easing program, may not seem earth-shattering in the same way as the near-collapse of every major bank in US and Europe. Yet the upheavals now happening in central banking represent a tectonic shift that could transform the economic landscape as dramatically as the financial earthquake four years ago. (source: by Anatole Kaletsky – Reuters – 19/09/2012)

To see why, we must go back in history 40 years, to the early 1970s. Maintaining full employment was at that time regarded as the main objective of all economic policy, and this had been the case for roughly 40 years, since the Great Depression. But by the early 1970s, voters had enjoyed decades of more or less full employment and were starting to focus on inflation rather than depression as main threat to their prosperity. Economists and politicians were responding to this shift. Milton Friedman led a monetarist “counterrevolution” against Keynesian obsession with unemployment, designing new economic models to challenge Keynesian view that market economies were naturally prone to long-term stagnation. By restoring the pre-Keynesian assumption that market economies were automatically self-stabilizing, monetarist models produced two powerful policy prescriptions directly opposed to the Keynesian views.

First, the monetarists insisted that price stability, rather than full employment, was the only legitimate target for monetary policy and government macroeconomic management more generally. Second, they argued that central bankers should not accept any direct responsibility for unemployment, since sustainable job creation depended solely on private enterprise, full employment would be achieved automatically if inflation were conquered, market forces, were allowed to operate freely, with minimum of government interference or union constraints. Few years later, Thatcher and Reagan turned Friedman’s intellectual revolution into practical politics. On top of its economic impact, monetarism had huge ideological effects by absolving the government macroeconomic management of any direct responsibility for the jobs, and instead attributing unemployment to regulations, unions, welfare policies, other market distortions. The historic significance of this month’s central bank decisions should now be clear. The Fed has promised to keep printing money until full employment is restored, and it has committed itself to even bolder measures if those announced last week prove inadequate. The ECB has undertaken to “do whatever it takes” to preserve euro and specifically to buy Spanish and Italian government bonds with newly created euros in unlimited amounts. In making these announcements, the Fed and the ECB were not just demoting their previously inviolable inflation targets to near-irrelevance. They were breaking intellectual and political taboos had dominated central banking for 4 decades. This iconoclasm has prompted extreme reaction from the one remaining bastion of traditional monetarism in central banking, Germany’s Bundesbank. On Tuesday, the Bundesbank’s president, Jens Weidmann, described new central banking quite literally as work of the devil; Mephistopheles, he recalled, had used just such policies to create chaos and hyperinflation in Goethe’s Faust. And indeed, attempts to use monetary policy to restore full employment will need to overcome 2 main objections presented by monetarist theory and repeated this week by Bundesbank. Will printing more money produce intolerable inflation? What happens if businesses fail to respond to monetary expansion by creating more jobs, won’t lead to ever more desperate and risky efforts to artificially stimulate employment?

Most of the admonitions against using monetary policies to achieve full employment focus on the risk of unleashing inflation. On this score, the Fed and the ECB have a very credible response, offered most recently from Bernanke and Draghi last week: As long as unemployment and industrial excess capacity remain anywhere near present levels, generalized inflation is unlikely. Even if some commodities, such as oil or food, experience inflation, this will be offset by others goods and services whose prices fall. The more insidious danger is that the Fed will simply fail in its efforts to stimulate job creation and accelerate economic growth. Disappointment was, after all, the outcome of the last two rounds of QE. So why should this one be any different, even if Fed keeps increasing the amount of new money printed? This is the troubling question that Ben Bernanke has so far failed to answer or even seriously confront. It may turn out that just injecting money into banks and bond funds is not sufficient, regardless of amounts. A genuine economic stimulus may require newly created money to be distributed directly to businesses or households as suggested here in the past. Imagine, for example, the extra $40 billion the Fed will pump every month into bond market were spent instead on a $130 monthly payment to every U.S. citizen, repeated until the economy returned to full employment. With taboo against central banks accepting responsibility for unemployment now completely broken, such truly radical monetary policies may just be a matter of time.