The Great Debate

Four years ago world leaders, meeting in the G20 crisis session, agreed they would all work to move from recession to growth and prosperity.  They agreed to a global growth compact to be delivered by combining national growth targets with coordinated global interventions. It didn’t happen. After the $1 trillion stimulus of 2009, fiscal consolidation became the established order of the day, and so year after year millions have continued to endure unemployment and lower living standards.

Only now are there signs that the long-overdue shift in national macro-economic policies may be taking place. The new Japanese government is backing up a “minimum inflation target” with a multi-billion-dollar stimulus designed to create 600,000 jobs. In what some call the “reverse Volcker moment,” Ben Bernanke has become the first head of a central bank for decades to announce he will target a 6 percent level of unemployment alongside his inflation objective. And the new governor of the Bank of England, Mark Carney, has told us that “when policy rates are stuck at the zero lower bound, there could not be a more favorable case for Nominal GDP targeting.” Side by side with this shift in policy, in every area but the Euro, there is also policy progress in China. It may look from the outside as if November’s Communist Party Congress simply re-announced their all-too-familiar but undelivered wish to re-balance the economy from exports to domestic consumption, but this time the promise has been accompanied by a time-specific commitment: to double average domestic income per head by 2020.

The intellectual case for change is obvious. A chronic shortage of demand has developed for two reasons. First, as the IMF announced at the end of 2012, the adverse impact of fiscal consolidation on employment and demand has been greater than many people expected. Secondly, the effectiveness of quantitative easing has almost certainly started to wane. As former BBC chief Gavyn Davies has put it, “the supply potential of the economy is in danger of becoming dependent on, or ‘endogenous to,’ the weakness of domestic demand. …With demand constrained in this way for such a lengthy period of time, supply potential is beginning to downsize to fit the low level of demand.” It is a new equilibrium that can be reversed only by boosting demand.

But why is there so little optimism when the paradigm shift sought in 2009 is finally starting to materialize? Why do experts continue to downgrade their forecasts for 2013 and even 2014, while discussion so often drifts toward talk of a lost decade? It is, I suggest, because while countries are today adopting national growth strategies, they have missed out on the other part of the 2009 decision — the necessity of coordinated global intervention. And the big question is whether the momentum for growth can be sustained by national initiatives alone in the absence of global action or will instead melt away once again under the pressure of narrow, self-defeating national policies.

There is depressing testimony to stagnation produced by a lack of global demand. Olivier Blanchard, the IMF chief economist, has deployed devastating figures to demonstrate how fiscal consolidation has depressed the Western economy. Jonathan Portes of the National Institute of Economic and Social Research underlines the point: Austerity in one country reduces demand in the next and vice versa. ”The hit to output in Germany is now 2%. In the UK it is 5%; and in Greece 13%,” he wrote. Still more shocking is the impact on debt-to-GDP ratios. As Portes points out, fiscal consolidation was supposed to improve fiscal sustainability; instead, it makes matters worse. “This isn’t true just in extreme cases like Greece – fiscal consolidation across the EU has raised debt-to-GDP ratios in Germany and the UK as well. In both the UK and the euro area as a whole, the result of coordinated fiscal consolidation is a rise in the debt-GDP ratio of approximately five percentage points. For the UK, that means a debt-GDP ratio of close to 75% in 2013 instead of about 70%. We are not running to stand still; we are determinedly heading in the wrong direction.”

President Barack Obama should hope that old adage, “You only get one chance to make a first impression,” isn’t true. In his second Inaugural Address Monday, he has a chance to sharpen his arguments and move the nation in a way that eluded him the first time around.

Instead of a soggy sermon about political maturity, Obama should offer a ripping defense of his vision of government and its role in the economy. He has nothing to fear but controversy itself.

Obama faces a low bar. Facing history, presidents often choke. They know that these talks are among the only ones sure to be collected in a book or chiseled on the wall of their presidential library. The genre tends toward the ponderous.

Speaker John Boehner (R-Ohio) is now in Williamsburg, Virginia, meeting with his House Republican conference at their annual retreat. The GOP House members have likely gotten over the initial shock of the November elections – in which President Barack Obama won more than 51 percent of the vote and the Democratic majority swelled in the Senate.

Though the Republicans lost House seats and their candidates collected more than a million fewer votes than their Democratic rivals, the GOP retained a majority in the House of Representatives. This consolation prize has allowed Boehner to claim that House Republicans have a mandate every bit as compelling as that earned by the president. Conservative champions Grover Norquist and Representative Paul Ryan (R-Wis.) echoed this claim.

“It’s very wrong to suggest that only the president has a mandate,” asserted former House Speaker Newt Gingrich, who knows from congressional mandates. “The House Republicans also have a mandate, and it’s a much more conservative mandate than the president’s.”

--Jocalyn Clark (@jocalynclark) is Senior Editor at PLOS Medicine. The opinions expressed are the organisation's own.--

While coverage of health care has increased considerably since the international community defined its millennium development goals to improve health around the world, health gains remain stubbornly elusive, especially in developing countries, and poor quality of care may be the reason why.

These are the conclusions of leading maternal health scholar Dr. Wendy Graham and her colleagues as they reflect on the global progress in women’s and children’s health in preparation for the global maternal health conference in Arusha, Tanzania this week that brings together 700 delegates and political leaders from around the world.

Many economists and analysts are concerned that the next candidate for a federal bailout is not still-too-big-to-fail banks but financially irresponsible states. We have written about the threat that failed states such as California, Illinois, Connecticut, Maryland and New York pose to the fiscal health of the nation.

But the problem is bigger. In coming years, University of Chicago economics professor Brian Barry predicts, “Both parties are likely to clash over state-budget issues at the national level, no matter what happens to federal taxes or healthcare spending.”

Skyrocketing unfunded state pension liabilities, up to $4 trillion according to some estimates, are driving already financially troubled states down the path to insolvency,  and there appears to be no political will to address the problem. States in the most dire fiscal situations are high-tax, left-leaning and Democratic-controlled, and according to Barry pose a “long-term threat to the permanent national majority that many Democrats believe they see emerging from the past two presidential elections.”

In these hard times, many people believe the solution to our nation’s economic ills can be summed up in one word – jobs. But that’s just the start. A stable economy can only exist when every family finds a place in the economic mainstream. Finding that place requires financial literacy.

Yet the basic financial skills much of the middle class learned as teenagers can be a foreign language to the working poor. Real economic inclusion takes savvy – knowing how to handle workplace challenges, stick to a budget, and build good credit. If middle-class and well-off Americans benefit from financial counsel, then why not the working poor?

Financial literacy matters. Far more than half of all Americans will slip in and out of poverty at least once in their lifetime. Struggling to make ends meet is harder when you don’t know the financial ropes. It means continuing to rely on costly, seat-of-the-pants solutions when money is tight – like payday loans and check-cashing outlets.

In many respects the economy is healing, as both the unemployment rate and hiring statistics slowly improve. But there are growing numbers of Americans being left out.

These are not just the unemployed. Rather they are families that, despite having a working adult in the home, earn less than twice the federal poverty income threshold – a widely recognized measure of family self-sufficiency. They are working, but making too little to build economically secure lives. And their number has grown steadily over the past five years.

They are cashiers and clerks, nursing assistants and lab technicians, truck drivers and waiters. Either they are unable to find good, full-time jobs, or their incomes are inadequate and their prospects for advancement are poor.

Financial conditions in the euro zone have significantly improved since the summer, when euro zone risks peaked because of German policymakers’ open consideration of a Greek exit, and the sovereign spreads of Italy and Spain reached new heights. The day before European Central Bank President Mario Draghi’s famous speech in London in which he announced that the ECB would do “whatever it takes” to save the euro, bond yields in Spain and Italy were at 7.75 percent and 6.75 percent, respectively, and rising. When the ECB announced its outright monetary transactions (OMT) bond-buying program, the euro zone was at risk of a collapse.

Since then, risks have abated significantly, thanks to a number of factors:

The ECB’s OMT has been incredibly successful in reducing the risks of breakup, redenomination and a liquidity/rollover crisis in the public debt markets of Spain and Italy. Although the ECB has yet to spend a single additional euro to buy the bonds of Spain and Italy, both short-term and longer-term sovereign spreads against German bonds have fallen substantially. Following a number of political and legal hurdles, the successful operational start of the European Stability Mechanism (ESM) rescue fund provides the euro zone with another €500 billion of official resources to backstop banks and sovereigns in the euro zone periphery, on top of the leftover funds of its predecessor, the European Financial Stability Facility (EFSF). Realizing that a monetary union is not viable without deeper integration, euro zone leaders have proposed a banking union, a fiscal union, an economic union and, eventually, a political union. The last is necessary to resolve any issue of democratic legitimacy that might result from national states transferring power from national governments to EU- or euro zone-wide institutions. This transfer of power also would have to involve the creation of such institutions to ensure solidarity and risk-sharing are developed in the banking, fiscal and economic unions. The open talk in the summer by some German authorities about an exit option for Greece has turned into a tentative willingness to prevent and postpone such an exit. There are several reasons for this. First, Greece has done some austerity and reforms in spite of a deepening recession, and the current coalition is holding up. Second, an orderly exit of Greece is impossible until Spain and Italy are successfully isolated. Such an exit would lead to massive contagion, which would hurt not only the euro zone periphery but also the core, given extensive trade and financial links. Third, an economic disaster in Greece would be damaging to the CDU Party’s chances of winning the German elections. Thus, even when Greece inevitably underperforms on its policy commitments, Germany and the troika (the IMF, EU and ECB) will hold their noses and keep the funds flowing as long as the current coalition holds up.

Given these developments, the risk of a Greek exit in 2013 has been significantly reduced, even if the risk of an eventual Greek exit from the euro zone is still high, close to 50 percent by my estimation. Meanwhile, the narrowing of Spanish and Italian sovereign spreads has significantly diminished the risk that either country will fully lose market access and be forced to undergo a full troika bailout like Greece, Portugal and Ireland. Both Spain and Italy may in 2013 opt for a memorandum of understanding (MoU) that opens the taps of ESM and OMT support, but such official financing would inspire confidence as it would not be associated with rising, unsustainable spreads and a loss of market access.

While there is a much lower likelihood of disorderly events in the euro zone, there are still significant obstacles to deeper integration, as well as country-specific economic and political vulnerabilities. The biggest obstacle to the formation of a banking, fiscal, economic and political union is that Germany is pushing back against the time line for action, with the initial skirmish on ECB supervision of euro zone banks. This backpedaling reflects deep German skepticism on whether the resolution of the euro zone crisis requires a move toward greater union. Without a more credible commitment to austerity and reforms from euro zone periphery countries, lurching forward would imply that risk-sharing will turn into a large, long-term transfer union, which is unacceptable to Germany and the core. Thus, Germany will do whatever is necessary to delay the integration process, at least until after elections in fall 2013.

One big part of the well-financed campaign for economic austerity is the contention that the public debt is like a national credit card. If we keep charging on it, the argument goes, we’ll get overwhelmed with interest costs, suffer a reduced standard of living and, pretty soon, go bankrupt.

As David Walker, a prominent budget hawk and the former head of the billion-dollar Peter G. Peterson Foundation, has contended, “Both Republicans and Democrats in Washington have charged everything to the nation’s credit card, including tax cuts and spending increases, without paying for them.”

The Peterson Foundation is the leading sponsor of this brand of bogus economics. It is a spurious metaphor on so many levels that it’s hard to know where to begin.

As Hillary Rodham Clinton finished her last few weeks on the job, after a month of convalescence, how can we assess the secretary of state’s contributions?

The question is worth asking simply because of the job’s importance and its significance for U.S. national security. It is also relevant given Clinton’s unprecedented role in our national life over the last two decades.

She is probably the most politically powerful woman in U.S. history — at least in terms of positions held. She has come closer to being elected president than any other woman. She may well try again, and her record as secretary may be the best way to judge her candidacy for the highest job in the land. So how has she done?