The global economic summit
After the fall
On November 15th world leaders are due to sit around a table in Washington, DC, to fix finance. They have their work cut out
THE leaders arriving in Washington, DC, for this weekend’s economic summit are being presumptuous. If they want what they are calling Bretton Woods 2 to live up to the original, which took place in New Hampshire overshadowed by war and the Depression, it will have to establish a new economic order for the capitalist world. In 1944 that meant creating the IMF, the World Bank and a body to oversee world trade. Imagine Hank Paulson, America’s treasury secretary, as John Maynard Keynes; or picture Gordon Brown, Britain’s prime minister, as Winston Churchill (as Mr Brown himself secretly may), and you get a sense of the task ahead.
The Bretton Woodsmen of 2008 are grabbing the credit before they have earned it—rather as all those subprime householders did. More than two years of gruelling technical work laid the ground for the wartime conference of officials and finance ministers (prime ministers and presidents had other things to deal with). By contrast, the leaders gathering this weekend from the G20, a mix of industrial and emerging countries, plus the European Union, have cobbled together an agenda in a few frenetic weeks. They will doubtless produce no shortage of promises. Just what these are worth will depend on sweat and summits yet to come.
The summit is sure to stir up a debate about the institutions that oversee the international economy. By convening the G20 rather than the closed, rich club of the G7, the old order has in effect acknowledged that the rest of the world has become too important to bar from the room. But what new order should take its place? Answering that question has been a parlour game for economists since long before the crisis. By encouraging them to dust off their pet ideas, the summit will at the very least create a bull market in new schemes for global economic governance.
Because everyone agrees that something big needs fixing and that the world expects action, calling the summit Bretton Woods 2 could yet come to be seen as a rallying cry for reform. And yet there are lots of reasons to see it as vainglory. The agenda is vague and sprawling. With so many of the world's political leaders sitting around the table, it will be hard to escape platitudes and hypocrisy. There may be disagreements—especially where sovereignty or competitiveness is threatened. And most of all, the recent international financial collaboration is fraught with in-fighting and complexity.
At first sight, this summit seems no different. For instance, consider how Mr Brown and Nicolas Sarkozy, the president of France, have vied to claim paternity of the summit for their own domestic reasons. Mr Sarkozy sees a chance to show he is a man of action, and he will find it easier to force through domestic reform if he can show he is not in thrall to all that Anglo-Saxon free-market ideology.
Mr Brown has been calling for a global summit for weeks, emboldened by international acclaim for his plan to rescue Britain’s banking system. The prime minister is keen to show that the crisis is one of those worldwide messes that—honestly—has nothing to do with the past 11 years of Labour government. And he wants to play the lead in Washington so as to protect the free-market City of London from the Gallic machinations of Mr Sarkozy.
From despair, hope
But there is more to the summit than politics. Perhaps inevitably, the run-up to the summit has produced dozens of different proposals. Broadly, they fall into three areas. First and most urgent is the need to limit the crisis, which is even now spiralling from the rich world to emerging economies. Second is financial regulation: its flaws have been laid bare, and the summiteers will want to put it right. Third is global macroeconomics. The G20 needs to find ways to correct the imbalances—Asian saving and Western spending—that lay behind the boom.
Pervasive economic gloom is the best reason for hoping that something important will come of this weekend’s meeting. After savaging the financial markets, the credit crisis has broken loose into the real economy. This month the IMF lowered its forecast for global growth next year by 0.8 percentage points, to 2.2%. The rich world is already in recession. Unemployment, foreclosures and corporate bankruptcies are rising. Emerging economies have also been ensnared, as investors from richer countries retreat to their home markets. The fund cut its forecast for their growth rate by a percentage point, to 5.1%.
Such pain demands an ambitious policy response. On November 6th Kevin Warsh, a governor of the Federal Reserve, put it in dramatic terms: “We are witnessing a fundamental reassessment of the value of every asset everywhere in the world,” he said. “The establishment of a new financial architecture, thus, is the essential policy response to the greatest economic challenge of our time.”
The easy bit will be to harness that sense of urgency to produce concerted interest-rate cuts and government spending. Already, several countries are talking about a co-ordinated fiscal stimulus to help offset a collapse of private-sector demand. China set the standard on November 9th, with a huge spending plan worth 4 trillion yuan (nearly $600 billion), or about 15% of GDP (see article). Not everyone can muster such resources, but other countries, including America and Britain, are preparing to act too. Germany, which has promised a piffling €12 billion ($15 billion), may be shamed into spending more. With concerted action, countries will find that each national stimulus buys more confidence than it would do alone.
Many commentators also want to build confidence by increasing the spending power of the IMF. If a large emerging market, such as Poland or Turkey, were to need help, says Willem Buiter, an economist at the London School of Economics, its present resources of $250 billion “would be gone before you can say ‘special drawing rights’.” Although some European delegates want to strengthen the IMF, the Americans are resisting: the summit may produce nothing more than a pledge to find the money if the fund needs it.
In financial regulation, some changes ought to be easy to agree on—such as ensuring that banks stop holding assets off their balance-sheets and put capital aside against possible failures in a wider range of securities. The summit is also likely to try to bring order to the market for credit-default swaps, which trade the risk that borrowers will not honour bonds, by concluding that, within 120 days, the business should be routed through clearing houses rather than settled privately by investors.
That is progress, to be sure. But it is small potatoes next to the summiteers’ ambitions. And little else will be easy, even if the leaders can issue a declaration that sets out their common principles and a schedule of negotiations for further reform. To see why, leave behind the first Bretton Woods conference for the more recent history of international financial regulation.
No end of squabbles
The difficulty with cross-border rules in finance is explained by Barry Eichengreen, a professor at the University of California, Berkeley, and one of 20 economists from around the world who have written an “e-book”* that describes what this weekend’s summit should do.
On the one hand, finance is every country’s business. This crisis has shown that what happens deep inside one national financial system can wreck another halfway across the world. In the United States subprime lending was a relatively small bit of the mortgage market—itself just a part of America’s financial markets. And yet the cascade of failing credit and risk aversion that began there, partly as a result of inadequate supervision, has spread not just to the overstretched banking systems of Europe, but also now to untroubled banks in emerging markets.
On the other hand, nation-states jealously guard the right to oversee their own banks. This is not just out of principle, or a desire to see that the regulations suit their own financial institutions—although most regulators would think these alone to be sufficient reason. It is also because, when a crisis comes, the nation-state foots the bill for a bail-out. In addition, Wendy Dobson, of the University of Toronto, notes that regulators need intimate local knowledge of their charges and their own financial structures if they are to have a hope of prevailing—and even then, as the world has seen, the odds are against them.
The tug between national and supranational regulation has gradually led to an ad hoc arrangement for the international banking system. In the 1980s America and Britain grew worried about the expansion of Japanese banks, which by 1988 accounted for nine of the world’s ten largest by assets, up from one at the start of the decade. What bothered the West was that Japanese regulators allowed their banks to count shareholdings as core capital. Cheap capital fed their growth. And it was indeed reckless, as the subsequent collapse of the Japanese stockmarket showed.
Under the auspices of the Bank for International Settlements (BIS), a central bankers’ central bank in Basel, in Switzerland, the big economies agreed to set common standards for what counted as capital and how much a bank should hold in order to qualify as safe. Their negotiations were partly about rules to make the global financial system more resilient. But they were also, in effect, about a trade dispute, over what the West saw as a subsidy to Japan’s banks. This ambiguity between the common good and national interests complicates all financial negotiations—including any that will follow the G20 summit.
Andrew Gracie, who worked on regulatory design at the Bank of England and founded Crisis Management Analytics, which advises central banks on financial stability, points out that right from the start regulators looked at systemic risk one bank at a time. The assumption was that if each institution was safe, then the system as a whole would be too. Similarly, when banks had many subsidiaries, regulators short of money and time tended to worry only about their own piece of the jigsaw.
This “micro-prudential” philosophy was always questionable. Now it looks absurd. Banks tend to own similar assets. In a crisis the capital of the entire industry tends to fall, which means that the instability of one bank can undermine the standing of the next. Hence the talk about a new “macro-prudential” sort of regulation that seeks to take account of the whole system’s vulnerabilities, as well as the health of individual banks, by, say, adjusting capital charges over the economic cycle.
The strengths of the original Basel standards (Basel 1) lay in being reasonably simple to negotiate and administer. But therein lay their weaknesses also. Banks soon started to favour business that was profitable (ie, risky) but which, under Basel 1’s crude definitions, escaped the appropriate capital charges. As the banks adapted to Basel 1, so the rules became less useful.
That gave rise to the effort to create Basel 2, which began in the late 1990s. This sought to strike a different balance, by asking banks to be more sophisticated in assessing the riskiness of their assets and thus their capital requirements. But sophistication came at a high cost. A recent book† by Daniel Tarullo, a professor of law at Georgetown University who is fancied for a senior economic post under Barack Obama, describes how the negotiations dragged on for years as governments jostled for a deal that would give their own banks some advantage. Mr Tarullo observes that the banks would accept all sorts of arbitrary provisions as long as the end result was to reduce the amount of capital they had to put aside.
Faults and lessons
Basel 2 is a flawed agreement. Although it is not yet in force, it already needs updating. Its chief failing is its reliance on rating agencies and the banks’ own models of the risks that they are carrying—an idea that has been discredited by the way banks have been caught out. In addition, the accord did not allow for the evaporation of liquidity that prevented the banks from financing their businesses. It is hardly reassuring that the minimum capital that rescued banks are aiming for today is far above the minimum set by Basel 2.
The story of bank-capital standards contains important lessons for the leaders gathering at the G20. The talks dragged on because their objectives were unclear, the subject matter was complex, negotiators were fighting for the upper hand and there was little sense of urgency. Even if all that can be put right, the schedule of work has expanded. Supervision may need to extend beyond banks, to any financial institution whose failure could threaten financial stability, which might include some large hedge funds and non-bank financial companies such as GE. The capital-standards regime also needs to become more macro-prudential. Regulators need to be able to put more trust in banks’ risk models and rating agencies and supplement them with simple rules about the level of borrowing. Mr Tarullo suggests that banks should issue new securities to serve as gauges of investors’ faith in them.
There are two difficulties in all this. The first is that it will take time and, as urgency fades and the negotiators drown in complexity, national interest may gain at the expense of collective safety. The second is that original dilemma: international rules require enforcement, but nation-states demand sovereignty. Dominique Strauss-Kahn, head of the IMF, wants an inspectorate. Mr Eichengreen has proposed a World Financial Organisation, with disciplinary panels. The EU wants “colleges” of national regulators for each bank and an IMF to give warning of crises. The summit looks most likely to back the EU idea—but it ought to be more ambitious. The system will work only if governments heed outside warnings. But just look at how they browbeat the IMF into giving favourable assessments of their economies.
Although this summit looks likely to dwell on financial regulation, it cannot ignore the macroeconomics that preoccupied the original Bretton Woods conference all those years ago. As Martin Wolf, a columnist at the Financial Times, explains in a new book‡, the boom was fuelled by the imbalances that grew out of the Asian financial crisis in 1997.
Countries that had grown used to incoming foreign capital suffered terribly when it suddenly flowed back out again. To protect themselves in future, they started to run current-account surpluses and to amass foreign-exchange reserves. Spendthrift America and Britain were happy to help Asia save, even if that meant running the corresponding deficits.
Surpluses are all very well, but they cannot continue to accumulate for ever. Perversely, if they unwind violently, they will create instability. Much of the cheap money recycled from the saving countries found its way into housing and other assets in the West. It was too much to hope that it would flow back out of those assets in an orderly way.
The conflict between sovereignty and safety here is even less easy to disentangle than it is in financial regulation. Clearly, no country would agree to live by a rule that it should balance its current account. Raghuram Rajan, a professor at the University of Chicago and a former chief economist at the IMF, points out that current-account surpluses and deficits can indeed help countries cope with shocks and finance investment. At the same time, no international organisation like the IMF could plausibly have the independence or the resources to make a credible promise to back all the economies suffering from capital flight in a crisis.
This conundrum leads straight back to a souped-up IMF—still too small to save the world, admittedly, but bigger than today’s, and backed by swap lines from the three large regional central banks, the Fed, the European Central Bank and eventually the People’s Bank of China. For that to work and for the IMF’s help to lose some of its stigma, rich countries will have to admit more emerging economies to the fund’s board. Cue yet more difficult negotiations.
There are two ways of thinking about this weekend’s summit in Washington. To be charitable, look on and wonder at the sheer ambition of taking on so many hard, important questions. A severe financial crisis may be the only time when the technicalities wallowing near the bottom of policymakers’ agendas receive the attention they deserve. But there is a more cynical interpretation. Perhaps the summiteers will bask in the headlines and then, out of the glare of the television lights, set about something disappointingly modest.
Obama's Car Puzzle
Even as GM teeters toward bankruptcy and wheedles for billions in public aid, its forthcoming plug-in hybrid continues to absorb a big chunk of the company's product development budget. This is a car that, by GM's own admission, won't make money. It's a car that can't possibly provide a buyer with value commensurate with the resources and labor needed to build it. It's a car that will be unsalable without multiple handouts from government.
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APThe first subsidy has already been written into law, with a $7,500 tax handout for every buyer. Another subsidy is in the works, in the form of a mileage rating of 100 mpg -- allowing GM to make and sell that many more low-mileage SUVs under the cockamamie "fleet average" mileage rules.
Even so, the Volt will still lose money for GM, which expects to price the car at up to $40,000.
We're talking about a headache of a car that will have to be recharged for six hours to give 40 miles of gasoline-free driving. What if you park on the street or in a public garage? Tough luck. The Volt also will have a small gas engine onboard to recharge the battery for trips of more than 40 miles. Don't believe press blather that it will get 50 mpg in this mode. Submarines and locomotives have operated on the same principle for a century. If it were so efficient in cars, they'd clog the roads by now. (That GM allows the 50 mpg myth to persist in the press, and even abets it, only testifies to the company's desperation.)
Hardly mentioned is the fact that gasoline goes bad after a few months. If the Volt is used as intended, for daily trips of 40 miles or less, the car's tank will have to be drained periodically and the gas disposed of.
The media have been terrible in explaining how the homegrown car companies landed in their present fix, when other U.S. manufacturers (Boeing, GE, Caterpillar) manage to survive and thrive in global competition. Critics beat up Detroit for building SUVs and pickups (which earn profits) and scrimping on fuel-sippers (which don't). They call for management's head (fine -- but irrelevant).
These pre-mortems miss the point. Critics might more justifiably flay the Big Three for failing long ago to seek a showdown with the UAW to break its labor monopoly. In truth, though, politicians have repeatedly intervened to prevent the crisis that would finally settle matters.
The Carter administration rushed in with loan guarantees to keep Chrysler out of bankruptcy. The Reagan administration imposed quotas on Japanese imports to prop up GM. Both parties colluded in the fuel-economy loophole that allowed the passenger "truck" boom that kept Detroit's head above water during the '90s.
Barack Obama and Nancy Pelosi now want to bail out Detroit once more, while mandating that the Big Three build "green" cars. If consumers really wanted green cars, no mandate would be necessary. Washington here is just marching Detroit deeper into an unsustainable business model, requiring ever more interventions in the future.
The Detroit Three will not bounce back until they're free to buy labor in a competitive marketplace as their rivals do. In the meantime, private money, even in bankruptcy, almost certainly will not be available to refloat GM and colleagues. Nationalization, with or without a Chapter 11 filing, is probably inevitable -- but still won't make them competitive.
History seldom affords such perfect analogies: In 1968, the Penn Central merger (a proxy for GM-Chrysler) was touted as a fix for a sagging rail business. In two years, the company was in bankruptcy. When a judge couldn't find new lenders, Washington absorbed them into government-owned Conrail, but the death spiral continued. Finally, Congress passed the deregulatory Staggers Act, which overnight gave the rail industry back its future. Conrail was triumphantly reprivatized in 1987.
We're about to replay this ordeal with the auto industry. Let's at least give ourselves a chance to be successful on the first try.
The simplest step forward would be to get rid of the "two fleet rule," devised by Congress's fuel-mileage managers to keep Detroit making small econoboxes in high-cost UAW factories. Dumping the rule would force the UAW to compete directly inside each company for jobs against cheaper workers abroad.
Even better would be to dump CAFE altogether. If Congress really thinks consumers must be encouraged to use less gas, replace it with an intellectually honest gas tax. Mr. Obama promised to transcend the old stalemates -- let him begin with the 30-year-old fraud that our fuel-economy rules represent.
He ran a brilliant campaign, but his programmatic prescriptions amounted to handwaving designed to capture the presidency rather than tell voters what really to expect. This may have been a virtue in campaigning but it becomes a handicap in governing. The public now has no idea what to expect -- except miracles, reconciling all opposites, turning all hard choices into gauzy win-wins. Thanks to Detroit, his honeymoon is about to end before it begins.
Barack Obama and the Taxpayer
by Alan Reynolds
In their 1992 presidential campaign book, Putting People First, Bill Clinton and Al Gore said, "We will lower the tax burden on middle-class Americans by asking the very wealthy to pay their fair share. Middle-class taxpayers will have a choice between a children's tax credit or a significant reduction in their income tax rate."
By Jan. 15, 1993, however, the newly elected President Bill Clinton told The New York Times that because of worsening deficit projections he was forced to renege on his campaign promises for a middle-class tax cut:
"Mr. Clinton spoke throughout the campaign of the need to redress declining middle-class incomes during the 1980s. He proposed a tax cut for the middle class nearly a year ago, in New Hampshire, and repeated the pledge frequently. But in the weeks since his election . . . the new team of Clinton economic advisers has apparently made new calculations and concluded that the tax cut idea is not tenable if Mr. Clinton wants to reduce the deficit and also move ahead with an 'investment' program to revive the economy. Growing deficit estimates require a president to shift gears, he said, adding: 'I think that it would be irresponsible for any president of the United States ever not to respond to changing circumstances.'"
Cynics have suggested that once President-elect Barack Obama confronts a frightening 2009 deficit of at least $1 trillion, he, too, will renege on his "middle-class tax cuts." When asked about the Clinton precedent, though, Obama said he would have made different choices. He implied that redistribution through the tax code is his first priority.
Shortly before the election I wrote, "The most troublesome tax increases in Barack Obama's plan are not those we can already see but those sure to be announced later, after the election is over and budget realities rear their ugly head."
A 20% tax rate on the dividends and capital gains of high-bracket taxpayers would raise little or no revenue, but it is nothing to get terribly agitated about. Raising top tax rate to 39.6% would discourage some effort and investment, but many professionals and small businesses could avoid that by sheltering more income under the lower corporate tax. Obama's plan to phase out deductions and personal exemptions for those same taxpayers would be brutally unfair to large families and those living in high-tax "blue" states, so it might even prove to be foolish politics.
Those who imagine the government won't try to raise taxes during a recession have short memories.
Those who imagine the government won't try to raise taxes during a recession have short memories. The Omnibus Budget Reconciliation Act was signed by George Bush Sr. on Nov. 5, 1990--months after the economy slipped into recession that July.
Looking beyond next year, the biggest fiscal danger is not the tax increases Obama describes as such, but the tax increases he describes as "tax cuts"--namely, $1.3 trillion of unfunded entitlements to "refund" checks amounting to $500 to $4,000 apiece.
Under one Obama plan, if you save $1,000 and take care not to earn too much, the government will send you $500. A student with family income below $100,000 (one spouse should stay home) could get $4,000 for 100 hours of community service, which is $40 an hour tax-free.
There is a $3,000 child care credit which is taken away as income rises from $30,000 to $58,000. There is another $500 refundable tax credit per job to make Social Security benefits appear free, but it phases-out quickly above $75,000 (a figure Obama described as $200,000). It is quite possible to collect several such checks, but earning more income can then result in losing more than 50 cents on every extra dollar earned as the credits clawed back.
An Oct. 23 Wall Street Journal editorial, "An Obamanomics Preview," concluded that "If Mr. Obama really wants a 'stimulus,' he'll announce that given the condition of the economy he won't raise taxes at all." Convenient as they may seem, such countercyclical (Keynesian) arguments quickly turn against you whenever the economy is not in recession--which is most of the time.
When the economy recovers next year (as it always does if politicians restrain their meddling), Democrats will doubtless give credit for the recovery to the new president. But they might also try to convert the Republican "don't raise taxes in recession" mantra into an invitation to raise tax rates after the recession has passed.
A potentially bigger problem is that Obama may well use the countercyclical argument to his advantage by putting off the issue until 2010, when the Bush tax cuts simply expire.
If tax increases are not enacted in 2009, why bother to raise only a few tax rates during 2010 when doing nothing at all would automatically result in total repeal of all the 2001-2003 tax cuts?
Armed with that lucrative blank slate as the looming new baseline, a Democratic president and Congress could magnanimously agree to preserve only the fiscally wasteful "feel good" aspects of the original Bush bill--the hugely expensive 10% tax rate and child credit, for example--while letting more than just the top two tax rates go back up, and lifting the estate tax rate, too. All in the name of fiscal responsibility, of course.
Higher tax rates always fail to raise the revenue their proponents are counting on. When that happens, we know where Democrats will look to raise more. And that is to reach even deeper into the pockets of any remaining profitable businesses or (even rarer) successful investors.
For those looking beyond one year, the biggest risk to both individual and corporate taxpayers is not that the new president will make good on his promises to raise a few tax rates and close a few loopholes. The biggest risk is that he will make good on his grander promises to enact all those tax-based entitlement programs disguised as "tax credits."
If millions more voters become accustomed to paying nothing for government (not even for their own Social Security benefits), and instead to receiving a bundle of Treasury checks, it will become almost as difficult for any future president to end those programs as it will be for taxpayers to pay for them.
There's Nothing Wrong with a "Big Two"
by Daniel J. Ikenson
The "Big Three" auto producers - Ford, Daimler-Chrysler and General Motors - want the public to believe their industry faces an existential threat. It doesn't. They want the public to believe they are innocent victims of circumstances beyond their control. They're not. They want the treasury secretary to authorize a fresh $25 billion bailout for the industry and the President-elect to pledge support for their parochial cause. Neither should (though Barack Obama apparently did this week, in his meeting with President Bush).
The auto industry doesn't need a bailout. It needs a shakeout.
Yes, it's true, some iconic firms - with General Motors at the top of the list - are in serious financial trouble and could fail. But why should those firms be bailed out by the taxpayers? While there is some merit to the suggestion that the industry's woes are attributable to the credit freeze, that's just a small part of the story.
Many of the Big Three's problems are self-made. The contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if Detroit should get a bailout, why not help America's home builders, coal miners and masseuses, too?
Detroit's problems predate the financial meltdown. Management and labor consigned the Big Three to a future of troubles when they agreed to preposterous work rules, requiring management to pay workers at 90% of their salaries when they were laid off. Those rules compelled General Motors in particular to keep pumping out vehicles in the face of shrinking demand earlier in the decade, ushering in the period of "0% financing" for five, six and seven years. Because labor costs were locked in, it made more sense to keep producing and selling at below the full cost of production.
Management also gave labor the "Cadillac platter" of health and retirement benefits, all of which substantially increased the cost of producing vehicles at unionized plants in America. Management and labor always assumed that the U.S. government would come to the rescue when the chickens came home to roost over this inefficient, uncompetitive cost structure.
The auto industry doesn't need a bailout. It needs a shakeout.
Those were only the beginning of the industry's economic sins. On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pickup trucks and SUVs would never fall out of favor. When SUVs and trucks are excluded, Big Three offerings barely make the list of the country's top 10 selling cars of the decade. None has been a top five seller. Shouldn't producers try to make things that people want to consume before scapegoating their failures and seeking bailouts?
But here's the equally important thing to realize: If GM fails - or even GM and Ford both fail - we are not facing the loss of the U.S. auto industry. There are plenty of profitable operations, particularly those operating outside of Michigan. In 2008, the Big Three accounts for roughly 55% of light vehicle production and 50% of sales. To speak of the U.S. automobile industry these days, one must include Honda, Toyota, Nissan, Kia, Hyundai, BMW - and other foreign nameplate producers who manufacture vehicles in the U.S.
Those producers are the other half of the U.S. auto industry. They employ American workers, pay U.S. taxes, support other U.S. businesses, contribute to local charities, have genuine stakes in their local communities and face the same contracting demand for automobiles as does the Big Three. The difference is that these companies have a better track record of making products Americans want to consume and are not seeking federal assistance.
If taxpayers are forced to subsidize automobile producers, they should at least be able to subsidize the successful ones.
If one or two of the Big Three went into bankruptcy and liquidated, people would lose their jobs. But the sky would not fall. In fact, that outcome would ultimately improve prospects for the firms and workers that remain in the industry. That is precisely what happened with the U.S. steel industry, which responded to waning fortunes and dozens of bankruptcies earlier in the decade by finally allowing unproductive, inefficient mills to shut down.
In 2001, 12 firms accounted for 75% of U.S. hot-rolled steel production. In 2007, three firms accounted for more than 80% of hot-rolled steel production. The consolidation has afforded the steel industry an alternative to requesting bailouts in the face of declining demand.
Following the steel industry's lead to an auto industry reckoning makes more sense - to the taxpayers, to the country, and ultimately to the auto industry - than another bailout.
How Far Left Will Obama Go?
by David Boaz
For decades Republicans promised voters that they would reduce the size and power of government if only they controlled the White House ... if only they controlled the Senate ... if only they controlled the entire government. Beginning in 2001, they did.
And instead of smaller government, Republicans delivered a trillion dollars in new federal spending, exploding earmarks, massive new entitlements, expanded federal control over schools and marriage, and a surge in executive power.
So how will President Obama and the Democrats govern?
Prediction: Despite conservative fears, they won't move left enough to satisfy the bloggers, activists and permanent protesters who have been driven mad by the outrages of the Bush administration.
And they can't possibly satisfy the dewy-eyed dreamers who think Obama will transcend race and party and region and bring us all together to sing Kumbaya. The journalists who get chills when he speaks will likely discover that he is a young and inexperienced president facing difficult domestic and international problems that don't easily yield to eloquence.
Meanwhile, Democrats in control of the White House and both houses of Congress for the first time since 1994 will likely try to move even further left than Bill and Hillary Clinton did after the 1992 election. Despite President Bush's trillion-dollar increase in federal spending (even before the financial bailouts), the Democrats have another trillion dollars' worth of spending plans. At a time of economic weakness, they intend to raise taxes. They will push for a global-warming bill, even though any policy that could actually reduce warming would be so unbelievably expensive that even pumped-up Democrats will likely settle for a symbolic bill. (Thus angering the angry Left and the Al Gore faction.) Powerful House Democrats want to eliminate the 401(k) retirement system and force everyone into a government retirement plan.
Like the Clintons, Obama and his congressional colleagues will want to move quickly toward national health care. That idea is popular on the campaign trail, but it may become less so when Congress begins to debate the details of bringing 50 million more people into a government program, controlling private health insurance plans and restricting many people's choice of a doctor. It could be another HillaryCare debacle.
The victorious Democrats may also try to lock in their majority status through such measures as "card check" legislation, which would abolish secret ballot elections in determining whether employees are represented by unions, and a revival of the so-called Fairness Doctrine to shut down conservative talk radio, which played such a key role in drumming up opposition to the Clinton administration.
The 2010 election could be a lot more fun for Republicans with Obama in the White House than it would have been with McCain there.
In fact, Obama's first two years might end up sharing something very big with Clinton's. Believing that his election was not just a rejection of the Bush administration's failures but an affirmative endorsement of the liberal Democratic agenda, Obama might very well move too far left and create a Republican renaissance.
HillaryCare and other liberal policies turned Congress over to the Republicans in 1994; ObamaCare, tax hikes, out-of-control federal spending, and the other policies on the Pelosi-Reid agenda might do it again. The 2010 election could be a lot more fun for Republicans with Obama in the White House than it would have been with McCain there.
Of course, the economy often plays a role in elections. How strong will the economy be in the fall of 2010? Well, if Obama keeps bailing out industry after industry, raises taxes, and even threatens costly regulations on energy and finance, the economy is not likely to get any stronger. If that happens, the odds of another 1994 are high.
But business cycles, as they say, are cycles. There's a good chance that we're in a recession now and that we'll be in a recovery in 18 months. The U.S. economy has a great deal of underlying strength; fundamentals are indeed strong, as Obama ridiculed McCain for saying, and it may be able to recover from the housing bust fairly soon. Some economists say investors are already driving stock prices down in anticipation of Democratic control of the federal government, so that bad Democratic policies won't push the market down much further.
But the economy was in fairly good shape in 1994. Leading political scientist Walter Dean Burnham noted after the 1994 election that most elections in which the president's party lost at least 40 House seats were marked by an economic slump, but that was not the case in 1994. Even a strong economy might not save a party that pushed a strongly left-liberal agenda in a country that still believes in economic individualism.
Three or five years from now, small-government Republicans may look back and realize that the defeat of a second consecutive big-government Republican by a bigger-government Democrat was just what the Republican Party needed to rediscover its roots and come back fighting.
Restoring Financial Stability
Use Japan's experience as a guide to near-term problems – then think bigger.
TARO ASO
TOKYO
As leaders of the Group of 20 nations meet this weekend in Washington, we are faced with the financial crisis of the century. The leaders of major economies and international organizations must hammer out realistic yet substantive countermeasures.
One thing is clear: The stability of financial and capital markets must be the first priority of economic policy today. Whatever solution is proposed, it is clear that competition and capital flows based on free market principles should continue to serve as the foundations of growth. Yet we must also address the failure of government regulators around the world to keep pace with the innovation and globalization of financial products. Concerted action to coordinate various countries' policy efforts has now become an unavoidable challenge.
In the near term, Japan's own experience with the bursting of a bubble economy, a subsequent financial crisis and a recovery process could serve as a useful guide on how to contain the immediate impact of the financial crisis on the real economy and restore the stability of the financial system.
First, an early and thorough disclosure of nonperforming loans held by banks, based on fair valuation and reliable standards, and the removal of those loans from their balance sheets must be the first priority. Slow and insufficient disclosure prolonged the bad debt problem in Japan.
Second, capital injections into banks with public funds must be accompanied by proper mechanisms to provide sufficient credit and to limit actions against management in the event the losses were caused by factors outside their control. In Japan, state authority to nationalize banks in the event of systemic risk also helped to resolve the problem.
Third, the supply of liquidity from central banks -- in particular, the smooth and ample supply of U.S. dollar liquidity -- must be maintained. In addition to global arrangements, further development of such regional mechanisms as the Chiang Mai Initiative -- a foreign-exchange swap mechanism in East Asia -- will be significantly helpful.
While the short-term challenges are conquered, the G-20 will also need to consider the medium-term issues at hand. I see at least seven areas to discuss.
First, so long as the global imbalances persist, the international currency system will remain vulnerable. Countries with excess consumption and dependent on external debt should rein in that consumption. Meanwhile, countries heavily dependent on exports for their growth should adopt self-sustaining, domestic demand-led growth models.
Second, the International Monetary Fund's role in monitoring financial markets and its early-warning functions to detect financial and economic crises in their initial stages need to be improved. Also, the Fund's financial resources must be increased to enable it to extend necessary assistance to emerging economies that drive world growth. Japan is prepared to lend up to $100 billion to the Fund as an interim measure before a capital increase takes place.
Third, international developmental financial institutions should also play an active role in stabilizing the world economy. In particular, a general capital increase should be implemented at an early stage for the Asian Development Bank, which currently has limited scope for new lending.
Fourth, the governance structures of the IMF, World Bank and other bodies -- including the issues of quota shares and share of voting rights -- need to be reviewed, to reflect properly the economic realities of the world today.
Fifth, the Financial Stability Forum -- an assembly of the financial supervisory authorities, fiscal authorities and central bankers of various countries -- should be given a status above standard-setting international institutions such as the Basel Committee. The Forum's functions and joint work with the IMF should be reinforced and the group should be reorganized to include membership from emerging economies.
Sixth, the International Accounting Standards Board now stands at the center of work which aims to achieve convergence in the accounting standards of various countries. Government authorities, companies, investors and others should be involved in this effort so that an objective and fair set of standards is prepared expeditiously.
Lastly, rules governing credit rating agencies are being tightened, mainly through the International Organization of Securities Commissions. I propose that discussions be held with a view to giving various countries legal authority over these agencies. Nurturing local credit rating agencies in each region in addition to global agencies is important for the development of regional bond markets.
In the long run, there are questions being raised about the very structure of the U.S. dollar-based international monetary system, and whether that structure is sustainable, given the changes in the U.S.'s global economic standing and the fact that the U.S. is the world's largest debtor nation. The fact is, however, that there is no feasible currency anchor other than the U.S. dollar under the current monetary system. We should be making efforts to support the dollar-based currency system, on which today's international economic and financial systems rely.
That doesn't mean that the world should count on the U.S. to solve all its problems. It is important for each region to move forward with regional economic cooperation. Regional cooperation in East Asia, for example, in the area of trade and finance, complement global initiatives very positively. Such efforts, coupled with global talks like the G-20 meeting this weekend, will lay the foundation for a more stable international financial system in the future.
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