tag:theconversation.com,2011:/us/topics/janet-yellen-7499/articlesJanet Yellen – The Conversation2023-08-30T18:15:05Ztag:theconversation.com,2011:article/2119872023-08-30T18:15:05Z2023-08-30T18:15:05ZWhy the United States will have to accept China’s growing influence and strength<iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/why-the-united-states-will-have-to-accept-chinas-growing-influence-and-strength" width="100%" height="400"></iframe>
<p>After wrapping up a recent four-day trip to China, United States Treasury Secretary Janet Yellen told a media briefing: “<a href="https://home.treasury.gov/news/press-releases/jy1603">We believe that the world is big enough for both of our countries to thrive</a>.” </p>
<p>While optimistic, Yellen’s statement is far from persuasive. It doesn’t represent the tense geopolitical landscape saturated with sanctions, <a href="https://www.reuters.com/world/white-house-detail-plans-restricting-some-us-investments-china-source-2023-08-09/">investment restrictions</a> and containment efforts.</p>
<p>Yellen’s was one of many visits by <a href="https://www.nytimes.com/2023/06/18/world/asia/blinken-china-xi-diplomacy.html">U.S. officials</a> to China in recent months. These overtures come on the heels of concentrated American efforts against what the U.S. perceives to be China’s increasing expansion and assertiveness in Asia. President Joe Biden’s administration has made its intentions clear about maintaining the status quo in Asia, and Beijing is responding cautiously.</p>
<p>How did relations between the U.S. and China become so antagonistic over the last decade?</p>
<h2>Conflicting policies</h2>
<p>In a news conference with Chinese President Jiang Zemin in 2002, then-President George W. Bush said: “<a href="https://georgewbush-whitehouse.archives.gov/news/releases/2002/02/20020221-7.html">China’s future is for the Chinese people to decide</a>.” But the current state of relations indicates the path the Chinese chose for themselves is not sitting well with the U.S.</p>
<p>In 2009, Secretary of State <a href="https://2009-2017.state.gov/secretary/20092013clinton/rm/2009a/01/115450.htm">Hillary Clinton suggested the Barack Obama administration wanted to go further than Bush had in developing the China-U.S. relationship</a>: </p>
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<p>“We need a comprehensive dialogue with China. The strategic dialogue that was begun in the Bush administration turned into an economic dialogue.” </p>
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<p>The Obama-era approach then culminated in a comprehensive pivot to <a href="https://obamawhitehouse.archives.gov/the-press-office/2011/11/17/remarks-president-obama-australian-parliament">the Asia-Pacific region in 2011</a> that resulted in American economic, security and diplomatic resources shifting towards the area.</p>
<p>During Donald Trump’s administration, U.S. policy priorities on China shifted back to economic relations as the trade <a href="https://www.reuters.com/article/us-usa-trump-trade/trump-calls-china-trade-deficit-horrible-ahead-of-asia-visit-idINKBN1D15AM">deficit between the two nations</a> became a central point of contention. The Trump approach was no longer dialogue, but rather direct confrontation.</p>
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<p>Under Biden, China <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/10/12/fact-sheet-the-biden-harris-administrations-national-security-strategy/">is deemed a “competitor</a>.” </p>
<p>Policy choices have included reducing economic dependence on Chinese supply chains, the creation of the <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/09/15/joint-leaders-statement-on-aukus/">Australia, United Kingdom and United States partnership known as AUKUS</a> and <a href="https://www.defense.gov/News/News-Stories/Article/Article/3350297/new-edca-sites-named-in-the-philippines/">gaining U.S. access to four additional military bases in the Philippines</a>. </p>
<h2>Chinese pragmatism</h2>
<p>While America’s China policy has transformed into confrontation, China’s overall foreign policy trajectory has largely been pragmatic and linear. </p>
<p>Since the 1990s, China has been explicit in its grand objective of a <a href="https://digitallibrary.un.org/record/234074?ln=en">multi-polar world</a> in which global politics is shaped by several dominant states.</p>
<p>When Xi Jinping ascended to the presidency in 2013, this aspiration became increasingly overt and assertive. A year earlier, Vice-President Xi announced China’s “two centennial goals” — one calling for China to be “<a href="https://www.globaltimes.cn/page/202210/1277160.shtml">prosperous, strong, democratic, culturally advanced, harmonious and beautiful</a>” with influence over the global world order by 2049.</p>
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<a href="https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Two men in dark suits with red ties shake hands." src="https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=527&fit=crop&dpr=1 754w, https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=527&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/545362/original/file-20230829-16-tnyyuy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=527&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Hu Jintao, left, poses with his successor Xi Jinping after Xi was elected at a plenary session of the National People’s Congress in Beijing in March 2013.</span>
<span class="attribution"><span class="source">(AP Photo/Ng Han Guan)</span></span>
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<p>To analyze Chinese-American relations, the metaphor of the <a href="https://foreignpolicy.com/2017/06/09/the-thucydides-trap/">Thucydides’ trap</a> — in which a rising power challenges an existing one — may not be the most appropriate analogy. And phrases like “the rise of China” don’t do justice to China’s history. </p>
<p>China has been a great power, regionally at least, for thousands of years and was a <a href="https://doi.org/10.1111/poms.13010">manufacturing behemoth even in the 1750s</a>.</p>
<p>Geopolitically, the U.S. continues to retain a military and diplomatic edge over China. It has demonstrated its will and capability to <a href="https://www.reuters.com/world/biden-says-us-forces-would-defend-taiwan-event-chinese-invasion-2022-09-18/">determine the rules of engagement in China’s own backyard</a>. </p>
<p>But even though China trails the U.S. in many areas, it doesn’t need American support as much as it used to. Astonishingly rapid development in the last two decades is probably still far from China’s most creative and innovative phase.</p>
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<h2>American limitations</h2>
<p>There are also limits to the American field of influence in the region.</p>
<p>The U.S. has failed to move beyond strengthening existing alliances and fortifying its military installations. Its geo-strategic options are also limited. If, for example, the Americans shored up Japan’s offensive capabilities or deepened their partnership with India to challenge China, they would be inadvertently creating a multi-polar world.</p>
<p>China <a href="https://www.nytimes.com/2023/03/07/world/asia/china-us-xi-jinping.html">is not deterred</a> by American policy. It is <a href="https://foreignpolicy.com/2023/04/12/europe-china-policy-brussels-macron-xi-jinping-von-der-leyen-sanchez/">countering it through the art of persuasion and dialogue</a>. But it too has exhibited its limits. </p>
<p>With <a href="https://www.theguardian.com/world/2023/jul/11/solomon-islands-signs-controversial-policing-pact-with-china">a few exceptions</a>, China has failed to convince even its neighbours of the sincerity of its intentions. A majority of Asian nations are either U.S. allies <a href="https://www.thestar.com.my/news/nation/2023/04/09/pm-asean-should-remain-neutral-amid--us-china-rivalry">or neutral</a>.</p>
<p>The ongoing tit-for-tat between the two nuclear and highly interdependent powers will continue to shape their relations, which is concerning for global peace and stability.</p>
<p>Will the U.S. peacefully share global influence with China? Will China abide by its <a href="https://www.fmprc.gov.cn/mfa_eng/wjdt_665385/zyjh_665391/201407/t20140701_678184.html">Five Principles of Peaceful Coexistence</a> and its <a href="https://www.fmprc.gov.cn/mfa_eng/topics_665678/zggcddwjw100ggs/jszgddzg/202208/t20220826_10754228.html">claim that it will never seek world domination</a>? It’s hard to say.</p>
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<h2>Four indicators of what lies ahead</h2>
<p>Several indicators, however, point to a somewhat balanced co-existence between the two as dominant power centres in the coming decades. </p>
<p>First, the U.S. has been unsuccessful in inhibiting China’s growth and expansion, and will likely be incapable of preventing the second-biggest economy from achieving its centennial goals.</p>
<p>Second, China is already present around the globe in terms of human capital, investment, manufactured products — and <a href="https://www.pewresearch.org/short-reads/2022/06/29/across-19-countries-more-people-see-the-u-s-than-china-favorably-but-more-see-chinas-influence-growing/">world public opinion about China is changing</a>.</p>
<p>Third, to use the Taoist metaphor, <a href="https://education.nationalgeographic.org/resource/taoism/">China is a hub that has many spokes</a> and has the capacity and will to invent many more. The hub is united and efficient; an economic downturn will only slow the social organism, not cause it to collapse.</p>
<p>When <a href="https://time.com/3901419/space-station-no-chinese/">China was barred from the International Space Station after the passage of a law by U.S. Congress</a> in 2011, for example, it constructed <a href="https://www.space.com/tiangong-space-station">Tiangong, a permanent space station</a>. </p>
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<img alt="An Asian woman and two Asian men in blue jumpsuits smile and wave standing in front of a large red and gold chinese flag." src="https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=418&fit=crop&dpr=1 600w, https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=418&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=418&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=526&fit=crop&dpr=1 754w, https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=526&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/545361/original/file-20230829-21-pufgvx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=526&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">China’s astronauts wave as they arrive to meet the media at the Jiuquan satellite launch center near Jiuquan in western China in June 2013 before later boarding a spacecraft to dock with China’s Tiangong 1 space lab.</span>
<span class="attribution"><span class="source">(AP Photo/Andy Wong)</span></span>
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<p>Fourth, the rise of non-liberal democratic regimes and weaknesses in democracies are creating a situation where some nations are gravitating towards China while others are moving away from the U.S.</p>
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<p>
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<strong>
Read more:
<a href="https://theconversation.com/trump-fuelled-chaos-shows-democracy-is-in-trouble-heres-how-to-change-course-152728">Trump-fuelled chaos shows democracy is in trouble — here's how to change course</a>
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<p>That said, political reason is too often at the mercy of short-term calculations. </p>
<p>The U.S. has shown no interest in sharing world leadership, nor has China shown any interest in deviating from its global aspirations. But even though they may appear to be on a collision course, it seems likely China is going to be successful in its pursuit, and both nations will ultimately learn to co-exist and thrive. </p>
<p>Until then, one can only hope that they spare the world the chaos and ugliness of power politics and use their creative energies for the betterment of the human condition.</p><img src="https://counter.theconversation.com/content/211987/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Yasar Bukan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Relations between the U.S. and China have become antagonistic over the last decade. Here’s why the relationship must change.Yasar Bukan, Lecturer in Global Politics & Political Philosophy, Toronto Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2065652023-06-22T12:45:30Z2023-06-22T12:45:30ZA BRICS currency is unlikely to dislodge dollar any time soon – but it signifies growing challenge to established economic order<figure><img src="https://images.theconversation.com/files/533267/original/file-20230621-21-r6auqr.jpg?ixlib=rb-1.1.0&rect=35%2C0%2C4000%2C2658&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A window into a new way of doing global economic business.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/view-of-a-reflection-on-a-window-of-a-man-staring-at-the-news-photo/1258374197?adppopup=true">Rodger Bosch/AFP via Getty Images)</a></span></figcaption></figure><p>Could a new currency be set to challenge the dominance of the dollar? Perhaps, but that may not be the point.</p>
<p>In August 2023, <a href="https://twitter.com/CyrilRamaphosa/status/1633803100308791299">South Africa will host</a> the leaders of Brazil, Russia, India, China and South Africa – a group of nations known by the acronym BRICS. Among <a href="https://www.bloomberg.com/news/articles/2023-05-10/south-africa-urges-careful-debate-on-option-of-introducing-brics-common-currency#xj4y7vzkg">the items on the agenda</a> is the creation of a new joint BRICS currency. </p>
<p>As a scholar who has <a href="https://sites.tufts.edu/cierp/rising-power-alliances-project/">studied the BRICS countries</a> for over a decade, I can certainly see why talk of a BRICS currency is, well, gaining currency. The BRICS summit comes as countries across the world are confronting a changing geopolitical landscape that is <a href="https://theconversation.com/the-global-south-is-forging-a-new-foreign-policy-in-the-face-of-war-in-ukraine-china-us-tensions-active-nonalignment-207078">challenging the traditional dominance of the West</a>. And while the BRICS countries have been seeking to reduce their reliance on the dollar for over a decade, <a href="https://www.bbc.com/news/world-europe-60125659">Western sanctions on Russia</a> after its invasion of Ukraine have accelerated the process.</p>
<p>Meanwhile, <a href="https://www.bbc.com/news/business-65474456">rising interest rates</a> and the recent <a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">debt-ceiling crisis</a> in the U.S. have raised concerns among other countries about their dollar-denominated debt and the demise of the dollar should the world’s leading economy ever default.</p>
<p>That all said, a new BRICS currency faces major hurdles before becoming a reality. But what currency discussions do show is that the BRICS countries are seeking to discover and develop new ideas about how to shake up international affairs and effectively coordinate policies around these ideas. </p>
<h2>De-dollarization momentum?</h2>
<p>With <a href="https://www.bis.org/statistics/rpfx22_fx.htm">88% of international transactions</a> conducted in U.S. dollars, and the dollar accounting for <a href="https://www.cnbc.com/2023/04/24/economic-and-political-factors-behind-acceleration-of-de-dollarization.html">58% of global foreign exchange reserves</a>, the dollar’s global dominance is indisputable. Yet de-dollarization – or reducing an economy’s reliance on the U.S. dollar for international trade and finance – <a href="https://www.reuters.com/markets/signs-de-dollarisation-emerge-dollar-top-currency-jpmorgan-2023-06-05/">has been accelerating</a> following the Russian invasion of Ukraine.</p>
<p>The BRICS countries have been <a href="https://www.cambridge.org/core/elements/can-brics-dedollarize-the-global-financial-system/0AEF98D2F232072409E9556620AE09B0">pursuing a wide range of initiatives</a> to decrease their dependence on the dollar. Over the past year, Russia, China and Brazil have <a href="https://markets.businessinsider.com/news/currencies/dollar-dominance-russia-china-india-brazil-oil-trade-reserve-currency-2023-1">turned to</a> greater use of non-dollar currencies in their cross-border transactions. Iraq, Saudi Arabia and the United Arab Emirates are actively <a href="https://www.dw.com/en/why-the-dollars-dominance-is-declining-in-the-middle-east/a-65662358">exploring</a> dollar alternatives. And central banks have sought to shift more of their currency reserves away from the dollar and <a href="https://www.ft.com/content/ef6ed550-422a-4540-a8af-41ff2ac30e67">into gold</a>.</p>
<p>All the BRICS nations have been critical of the dollar’s dominance for different reasons. Russian officials have been championing de-dollarization to ease the pain from sanctions. Because of sanctions, Russian banks have been <a href="https://time.com/6153951/swift-sanctions-russia/">unable to use</a> SWIFT, the global messaging system that enables bank transactions. And the West froze Russia’s <a href="https://www.businessinsider.com/repo-global-task-force-freeze-330-billion-russia-oligarch-assets-2022-6?utm_medium=ingest&utm_source=markets">US$330 billion</a> in reserves last year.</p>
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<img alt="Under a banner with Chinese letter and 'XIV BRICS SUMMIT' five screens show the face of five world leaders in front of flags." src="https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=352&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=352&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=352&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=443&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=443&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=443&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">BRICS leaders at the time of the 2022 summit.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/chinese-president-xi-jinping-hosts-the-14th-brics-summit-news-photo/1241486840?adppopup=true">Li Tao/Xinhua via Getty Images</a></span>
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<p>Meanwhile, the 2022 election in Brazil reinstated Luiz Inácio Lula da Silva as president. Lula is a longtime proponent of BRICS who previously sought to reduce Brazil’s dependence on and vulnerability to the dollar. He has reenergized the group’s commitment to de-dollarization and spoken about <a href="https://www.reuters.com/article/spain-brazil-lula/update-1-brazils-lula-supports-trading-currency-for-brics-countries-idUSL1N36T1WW">creating a new Euro-like currency</a>.</p>
<p>The Chinese government has also clearly <a href="https://www.fmprc.gov.cn/mfa_eng/wjbxw/202302/t20230220_11027664.html">laid out its concerns</a> with the dollar’s dominance, labeling it “the main source of instability and uncertainty in the world economy.” Beijing directly blamed the Fed’s interest rate hike for causing turmoil in the international financial market and substantial depreciation of other currencies. Together with other BRICS countries, China has also <a href="https://asia.nikkei.com/Politics/International-relations/Xi-rallies-BRICS-against-sanctions-abuse-Cold-War-mentality">criticized the use of sanctions</a> as a geopolitical weapon.</p>
<p>The appeal of de-dollarization and a possible BRICS currency would be to mitigate such problems. Experts in the U.S. are deeply divided on its prospects. U.S. Treasury Secretary Janet Yellen believes <a href="https://finance.yahoo.com/news/treasury-secretary-janet-yellen-says-041422267.html#:%7E:text=Treasury%20Secretary%20Janet%20Yellen%20said,most%20countries%20have%20no%20alternative.">the dollar will remain dominant</a> as most countries have no alternative. Yet a <a href="https://foreignpolicy.com/2023/04/24/brics-currency-end-dollar-dominance-united-states-russia-china/">former White House economist sees a way that</a> a BRICS currency could end dollar dominance.</p>
<h2>Currency ambitions</h2>
<p>Although talk of a BRICS currency has gained momentum, there is limited information on various models under consideration.</p>
<p>The most ambitious path would be something akin to the Euro, the <a href="https://www.ecb.europa.eu/euro/html/index.en.html">single-currency adopted</a> by 11 member states of the European Union in 1999. But negotiating a single currency would be difficult given the economic power asymmetries and complex political dynamics within BRICS. And for a new currency to work, BRICS would need to agree to an exchange rate mechanism, have efficient payment systems and a well-regulated, stable and liquid financial market. To achieve a global currency status, BRICS would need a strong track record of joint currency management to convince others that the new currency is reliable.</p>
<p>A BRICS version of the Euro is unlikely for now; none of the countries involved show any desire to discontinue its local currency. Rather, the goal <a href="http://infobrics.org/post/38136">appears to be</a> to create an efficient integrated payment system for cross-border transactions as the first step and then introduce a new currency. </p>
<p>Building blocks for this already exist. In 2010, the <a href="http://brics2022.mfa.gov.cn/eng/zdhzlyhjz/others/202208/t20220826_10754259.html">BRICS Interbank Cooperation Mechanism</a> was launched to facilitate cross-border payments between BRICS banks in local currencies. BRICS nations <a href="https://www.brics-pay.com/">have been developing “BRICS pay</a>” – a payment system for transactions among the BRICS without having to convert local currency into dollars. And there has been talk of a <a href="https://cointelegraph.com/news/brics-nations-discuss-shared-crypto-to-break-away-from-usd-and-swift">BRICS cryptocurrency</a> and of strategically aligning the development of <a href="https://cyberbrics.info/promoting-brics-economic-integration-via-central-bank-digital-currencies%EF%BF%BC">Central Bank Digital Currencies</a> to promote currency interoperability and economic integration. Since many countries expressed an interest in <a href="https://www.dailymaverick.co.za/article/2023-05-07-countries-of-the-global-south-show-a-surge-of-interest-in-joining-brics-anil-sooklal/">joining BRICS</a>, the group is likely to scale its de-dollarization agenda. </p>
<h2>From BRICS vision to reality</h2>
<p>To be sure, some of the group’s most ambitious past initiatives to set up major BRICS projects to parallel non-Western infrastructures have failed. Big ideas like developing a <a href="https://moderndiplomacy.eu/2018/06/12/brics-setting-up-its-own-credit-rating-agency/">BRICS credit rating agency</a> and creating a <a href="https://jsis.washington.edu/news/reactions-u-s-cybersecurity-policy-bric-undersea-cable/">BRICS undersea cable</a> never materialized. </p>
<p>And de-dollarization efforts have been struggling both at the multilateral and bilateral level. In 2014, when the BRICS countries launched the New Development Bank, its <a href="https://www.ndb.int/wp-content/uploads/2022/11/Agreement-on-the-New-Development-Bank.pdf">founding agreement</a> outlined that its operations may provide financing in the local currency of the country in which the operation takes place. Yet, in 2023, the bank remains heavily <a href="https://www.wsj.com/articles/a-bank-china-backed-to-challenge-the-dollar-now-needs-the-dollar-d9dc27ee">dependent on the dollar for its survival</a>. <a href="https://www.ndb.int/insights/address-by-ndb-president-dilma-rousseff-at-opening-of-the-plenary-session-of-the-8th-annual-meeting-of-the-ndb/">Local currency financing represents</a> around 22% of the bank’s portfolio, although its new president hopes to increase that to 30% by 2026. </p>
<p>Similar challenges exist in bilateral de-dollarization pursuits. Russia and India have sought to develop a mechanism for trading in local currencies, which would enable Indian importers to pay for Russia’s cheap oil and coal in rupees. However, <a href="https://money.usnews.com/investing/news/articles/2023-05-04/exclusive-india-russia-suspend-negotiations-to-settle-trade-in-rupees-sources">talks were suspended</a> after Moscow cooled on the idea of rupee accumulation.</p>
<p>Despite the barriers to de-dollarization, the BRICS group’s determination to act should not be dismissed – the group has been known for defying expectations in the past.</p>
<p>Despite many differences among the five countries, the bloc managed to develop joint policies and survive major crises such as the <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1758-5899.13010">2020-21 China-India border clashes</a> and the war in Ukraine. BRICS has deepened its cooperation, invested in new financial institutions and has been continuously broadening the range of policy issues it addresses. </p>
<p>It now has a huge network of interlinked mechanisms that connect governmental officials, businesses, academics, think tanks and other stakeholders across countries. Even if there is no movement on the joint currency front, there are multiple issues on which BRICS finance ministers as well as central bankers regularly coordinate – and the potential for developing new financial collaborations is particularly strong. </p>
<p>No doubt, talk of a new BRICS currency in itself is an important indicator of the desire of many nations to diversify away from the dollar. But I believe focusing on the BRICS currency risks missing the forest for the trees. A new global economic order will not emerge out of a new BRICS currency or de-dollarization happening overnight. But it can potentially emerge out of BRICS’ commitment to coordinating their policies and innovating – something this currency initiative represents.</p><img src="https://counter.theconversation.com/content/206565/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mihaela Papa previously received funding for BRICS research from Minerva Research Initiative federal grant.
She is affiliated with the Carnegie Council for Ethics in International Affairs.</span></em></p>Talk of a joint BRICS currency feeds into ‘decline of the dollar’ rhetoric. But it is the economic bloc’s focus on innovation that will reshape the international system.Mihaela Papa, Adjunct Assistant Professor of Sustainable Development and Global Governance, The Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2061742023-05-28T17:15:23Z2023-05-28T17:15:23ZDebt ceiling negotiators reach a deal: 5 essential reads about the tentative accord, brinkmanship and the danger of default<figure><img src="https://images.theconversation.com/files/528698/original/file-20230528-145930-1dir73.jpeg?ixlib=rb-1.1.0&rect=49%2C437%2C7766%2C4957&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden speaks to reporters about the tentative accord. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimit/5f4e2743ebcf4b4795d386cd54ea90d4/photo?Query=debt%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1041&currentItemNo=0">AP Photo/Susan Walsh</a></span></figcaption></figure><p>President Joe Biden and House Speaker Kevin McCarthy on May 27, 2023, <a href="https://www.bloomberg.com/news/articles/2023-05-28/white-house-republicans-reach-deal-to-avert-historic-us-default">agreed in principle to a tentative deal</a> that would raise the debt ceiling while capping some federal spending at current levels.</p>
<p>The accord, if approved by both houses of Congress, would avert an unprecedented default that threatens to derail the economy and put hundreds of thousands of Americans out of work. Negotiators agreed to lift the ceiling for two years – past the 2024 presidential election – while putting a temporary cap on most nondefense spending at 2023 levels. It would also reduce planned funding for the IRS, impose new work requirements on some people who receive benefits from the federal program known as SNAP and claw back billions of unspent funds from pandemic relief programs.</p>
<p>The Conversation has been covering the debt ceiling drama since January, when Republicans took over the House, raising fears that brinkmanship would lead to an economic catastrophe. Here are five articles from our archive to help you make sense of a couple key aspects of the tentative deal and provide context on the debt ceiling fight.</p>
<h2>1. What is the debt ceiling?</h2>
<p>First some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.</p>
<p>Steven Pressman, an <a href="https://ww4.newschool.edu/nssr/faculty/steven-pressman/">economist at The New School</a>, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to US$11.5 billion and required legislation for any increase.”</p>
<p>Since then, the debt ceiling has <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">been increased dozens of times</a>. It currently stands at $31.4 trillion – a figure reached in January. The Treasury has taken “extraordinary measures” to enable the government to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which is expected to happen by June 5, <a href="https://www.reuters.com/markets/us/yellen-moves-forecast-earliest-potential-us-default-date-june-5-2023-05-26/">according to Treasury Secretary Janet Yellen</a>, if the deal isn’t approved in time.</p>
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Read more:
<a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">Why America has a debt ceiling: 5 questions answered</a>
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<h2>2. The trouble with work requirements</h2>
<p>One of the biggest sticking points toward the end of negotiations was work requirements for recipients of government aid. The tentative deal would raise the age for existing work requirements from 49 to 54 years on able-bodied adults who have no children. This is less than what Republicans had earlier sought. There are exceptions for veterans and the homeless. </p>
<p>But if the goal is to help people find jobs and make more money, work requirements <a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">don’t actually do the job</a>, wrote <a href="https://scholar.google.com/citations?user=Zoc5_aMAAAAJ&hl=en&oi=ao">Kelsey Pukelis</a>, a doctoral student in public policy at Harvard Kennedy School who has studied the issue. Rather, they make it much harder for people who need food aid to get it. </p>
<p>“Our findings do suggest that work requirements restrain federal spending by reducing the number of people getting SNAP benefits,” she explained. “But our work also indicates that in today’s context, these savings would be at the expense of already vulnerable people facing additional economic hardship at a time when a new recession could be around the corner.”</p>
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Read more:
<a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">SNAP work requirements don’t actually get more people working – but they do drastically limit the availability of food aid</a>
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<h2>3. IRS funding takes a hit</h2>
<p>The deal also takes aim at a big boost in spending Congress gave the Internal Revenue Service beginning in 2022 to crack down on tax cheats and upgrade its software. Democrats agreed to a Republican demand to cut the extra IRS funding from $80 billion to $70 billion. </p>
<p>Back in August 2022, <a href="https://scholar.google.com/citations?user=J_S5pkkAAAAJ&hl=en&oi=ao">Nirupama Rao</a>, an economist at the University of Michigan, <a href="https://theconversation.com/will-the-inflation-reduction-act-actually-reduce-inflation-how-will-the-corporate-minimum-tax-work-an-economist-has-answers-188786">explained why Democrats included all that funding</a> in their Inflation Reduction Act and how it would help the IRS collect more tax revenue, since the agency does not fully collect all the taxes that are owed.</p>
<p>“The main target of this spending is the so-called tax gap, which is currently estimated at about $600 billion a year,” she wrote. “While an $80 billion investment that returns $204 billion already sounds pretty impressive, it may be possible that it’s a conservative estimate.”</p>
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Read more:
<a href="https://theconversation.com/will-the-inflation-reduction-act-actually-reduce-inflation-how-will-the-corporate-minimum-tax-work-an-economist-has-answers-188786">Will the Inflation Reduction Act actually reduce inflation? How will the corporate minimum tax work? An economist has answers</a>
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<h2>4. The hard road to compromise</h2>
<p>It took a long time for Republicans and Democrats to get the current agreement. </p>
<p>Yellen warned in January that the government was about to hit the debt limit and would be unable to pay all its bills by May or June. McCarthy and House Republicans, who hold a razor-thin majority, appeared unwilling to raise the debt ceiling unless they could extract <a href="https://apnews.com/article/debt-limit-bill-house-republicans-kevin-mccarthy-f73e6c2fce8abdfab4973c727ea79517">deep spending cuts</a>. Meanwhile, Biden <a href="https://www.reuters.com/world/us/biden-will-talk-budget-wont-negotiate-debt-ceiling-congress-meeting-white-house-2023-05-02/">refused to negotiate</a>, insisting on a clean debt ceiling bill. Both of those positions were dropped during negotiations. </p>
<p>Why did it take so long for them to reach a compromise? </p>
<p>Blame political trends that have been accelerating for decades, explained <a href="https://scholar.google.com/citations?user=cfH3-8sAAAAJ&hl=en&oi=ao">Laurel Harbridge-Yong</a>, a specialist in partisan conflict and the lack of bipartisan agreement in American politics at Northwestern University. Many Republicans come from very safe districts, which means their primary against other conservatives is more important than the general election. <a href="https://theconversation.com/most-voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-limit-206465">This makes it more important to stand firm</a> and fight until the bitter end. </p>
<p>“So you now have many Republicans who are more willing to fight quite hard against the Democrats because they don’t want to give a win to Biden,” she wrote. “Democrats are also resistant to compromising, both because they don’t want to gut programs that they put in place and also because they don’t want to make this look like a win for Republicans, who were able to play chicken and get what they wanted.”</p>
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Read more:
<a href="https://theconversation.com/voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-ceiling-206465">Voters want compromise in Congress -- so why the brinkmanship over the debt ceiling?</a>
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<h2>5. Latest in a long line of fiscal crises</h2>
<p>This was hardly the first fiscal crisis the U.S. government has faced. In fact, there have been many – including 22 government shutdowns since just 1976. </p>
<p><a href="https://www.linkedin.com/in/raymond-scheppach-19b98536">Raymond Scheppach</a>, a professor of public policy at University of Virginia, <a href="https://theconversation.com/link-205178">offered a brief history</a> of recent crises and the damage they’ve caused – and why a default would be far more consequential than past crises.</p>
<p>“While these were very disruptive and damaged the economy and employment, they pale in comparison to the potential effects of failing to lift the debt ceiling, which could be catastrophic,” he wrote. “It could bring down the entire international financial system. This in turn could devastate the world gross domestic product and create mass unemployment.”</p>
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Read more:
<a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">A brief history of debt ceiling crises and the political chaos they've unleashed</a>
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<p><em>Editor’s note: This story is a roundup of articles from The Conversation’s archives. Portions of this article originally appeared in <a href="https://theconversation.com/yellen-puts-congress-on-notice-over-impending-debt-default-date-5-essential-reads-on-whats-at-stake-204863">a previous article</a> published on May 2, 2023.</em></p><img src="https://counter.theconversation.com/content/206174/count.gif" alt="The Conversation" width="1" height="1" />
The deal would raise the ceiling for two years, cap some federal spending and impose new work requirements on certain federal benefits. It still needs the blessing of Congress.Bryan Keogh, Managing EditorMatt Williams, Senior International EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2048632023-05-02T17:23:54Z2023-05-02T17:23:54ZYellen puts Congress on notice over impending debt default date: 5 essential reads on what’s at stake<figure><img src="https://images.theconversation.com/files/523872/original/file-20230502-28-3tukkp.jpg?ixlib=rb-1.1.0&rect=12%2C38%2C4230%2C2723&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Treasury Secretary Janet Yellen doesn't want to look back in anger over a debt deadline missed.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/secretary-janet-yellen-leaves-after-an-open-session-of-a-news-photo/1483917268?adppopup=true">Photo by Alex Wong/Getty Images</a></span></figcaption></figure><p>Lawmakers have been <a href="https://apnews.com/article/x-date-debt-ceiling-yellen-treasury-borrowing-f726fd88a9bb7f72e50f0b948731ac57">given notice of a new deadline</a> if they are to avoid a damaging default on U.S. debt: June 1, 2023.</p>
<p>If Congress fails to raise the nation’s borrowing limit by that date, <a href="https://home.treasury.gov/news/press-releases/jy1454">Treasury Secretary Janet Yellen warned</a>, then the federal government risks being “unable to continue to satisfy all of the government’s obligations.”</p>
<p>Giving herself a little wiggle room by saying that it is pretty hard to work out the exact date of default, Yellen was clear on the potential impact: “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”</p>
<p>Yikes!</p>
<p>The warning may spur leaders in Congress into action. House Speaker Kevin McCarthy <a href="https://apnews.com/article/speaker-kevin-mccarty-debt-ceiling-biden-1dd542c6c7acfc2287e68e6facae2be4">fired the starting pistol on negotiations</a> over the debt ceiling in April, laying out the criteria under which Republicans would accept an increase. But McCarthy’s proposals – which have since passed <a href="https://www.theguardian.com/us-news/2023/apr/26/us-house-debt-ceiling-bill-passed-kevin-mccarthy">a narrow vote in the House</a> – have been shot down by the Biden administration for <a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">having strings attached</a> that Democrats deemed unacceptable.</p>
<p>Explaining why the U.S. has a debt ceiling in the first place – and why it is a constant source of political wrangling – is a complicated matter. Here are five articles from The Conversation’s archive that provide some of the answers.</p>
<h2>1. What exactly is the debt ceiling?</h2>
<p>So, some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.</p>
<p>Steven Pressman, an <a href="https://ww4.newschool.edu/nssr/faculty/steven-pressman/">economist at The New School</a>, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to US$11.5 billion and required legislation for any increase.”</p>
<p>Since then, the debt ceiling has <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">been increased dozens of times</a>. It currently stands at $31.4 trillion – a figure already reached. As a result, the Treasury has taken “extraordinary measures” to enable it to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which <a href="https://www.nytimes.com/2023/04/18/business/debt-limit-wall-street.html">is expected to happen in July</a> or August.</p>
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Read more:
<a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">Why America has a debt ceiling: 5 questions answered</a>
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<h2>2. ‘Catastrophic’ consequences</h2>
<p>How bad could it be if the U.S. does default on its debt obligations? Well, <a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">pretty bad</a>, according to Michael Humphries, <a href="https://tci.touro.edu/academics/faculty/">deputy chair of business administration at Touro University</a>, who wrote two articles on the consequences. </p>
<p>“The knock-on effect of the U.S. defaulting would be catastrophic. Investors such as pension funds and banks holding U.S. debt could fail. Tens of millions of Americans and thousands of companies that depend on government support could suffer. The dollar’s value could collapse, and the U.S. economy would most likely sink back into recession,” he wrote.</p>
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Read more:
<a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">If the US defaults on debt, expect the dollar to fall – and with it, Americans' standard of living</a>
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<h2>3. Undermining the dollar</h2>
<p>And that’s not all. </p>
<p>Such a default could undermine the U.S. dollar’s position as a “unit of account,” which makes it a widely used currency in global finance and trade. Loss of this status would be a <a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">severe economic and political blow</a> to the U.S. But Humphries conceded that putting a dollar value on the price of a default is hard: </p>
<p>“The truth is, we really don’t know what will happen or how bad it will get. The scale of the damage caused by a U.S. default is hard to calculate in advance because it has never happened before.”</p>
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Read more:
<a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">US debt default could trigger dollar’s collapse – and severely erode America’s political and economic might</a>
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<h2>4. Can McCarthy make a deal?</h2>
<p>Many of these concessions are known, such as allowing a single member of the House to call for a vote to remove him as speaker. But there many be others that remain secret and <a href="https://theconversation.com/house-speaker-mccarthys-powers-are-still-strong-but-hell-be-fighting-against-new-rules-that-could-prevent-anything-from-getting-done-197391">could be influencing McCarthy’s decision-making</a>, argued <a href="https://pennstatelaw.psu.edu/faculty/brand">Stanley M. Brand</a>, a law professor at Penn State and former general counsel for the House. These could make it much harder to reach a deal with Biden over the debt ceiling.</p>
<p>“Some of the new rules spawned by McCarthy’s concessions may appear to democratize the procedures for considering and passing legislation. But they are likely to make it difficult for members to get the working majority necessary to pass legislation,” Brand explained. “That could make things such as raising the statutory debt ceiling, which is necessary to avert a government shutdown and financial crisis, and passing legislation to fund the government, difficult.”</p>
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Read more:
<a href="https://theconversation.com/house-speaker-mccarthys-powers-are-still-strong-but-hell-be-fighting-against-new-rules-that-could-prevent-anything-from-getting-done-197391">House Speaker McCarthy's powers are still strong – but he'll be fighting against new rules that could prevent anything from getting done</a>
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<h2>5. The GOP endgame: A balanced budget</h2>
<p>Another condition McCarthy agreed to in January is to push for a “balanced budget” within 10 years.</p>
<p>The U.S. government hasn’t had a balanced budget since 2001, the year President Bill Clinton left office. <a href="https://www.hks.harvard.edu/faculty/linda-bilmes">Linda J. Bilmes</a>, a senior lecturer in public policy and public finance at Harvard Kennedy School who worked in the Clinton administration from 1997 to 2001, explained how they achieved that rare feat and <a href="https://theconversation.com/i-helped-balance-the-federal-budget-in-the-1990s-heres-just-how-hard-it-will-be-for-the-gop-to-achieve-that-same-rare-feat-198363">why it’s unlikely to be repeated today</a>. </p>
<p>“Back in 1997, after the smoke cleared, both the Clinton administration and the Republicans in Congress were able to claim some political credit for the resulting budget surpluses,” she wrote. “But – crucially – both parties recognized that a deal was in the best interest of the country and were able to line up their respective members to get the votes in Congress needed to approve it. The contrast with the current political landscape is stark.”</p>
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Read more:
<a href="https://theconversation.com/i-helped-balance-the-federal-budget-in-the-1990s-heres-just-how-hard-it-will-be-for-the-gop-to-achieve-that-same-rare-feat-198363">I helped balance the federal budget in the 1990s – here's just how hard it will be for the GOP to achieve that same rare feat</a>
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<p><em>Editor’s note: This story is a roundup of articles from The Conversation’s archives. Sections of this article appeared in a <a href="https://theconversation.com/speaker-mccarthy-lays-out-initial-cards-in-debt-ceiling-debate-5-essential-reads-on-why-its-a-high-stakes-game-204079">previous article</a> published on April 19, 2023.</em></p><img src="https://counter.theconversation.com/content/204863/count.gif" alt="The Conversation" width="1" height="1" />
If the US fails to increase its debt ceiling by June 1, it could be forced into an embarrassing – and hugely costly – default on its obligations.Matt Williams, Senior International EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1912702022-09-29T14:07:11Z2022-09-29T14:07:11ZAfrica risks losing out on trade as rich countries cement relationships with trusted partners<figure><img src="https://images.theconversation.com/files/487250/original/file-20220929-26-4j7um0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Japan's Prime Minister Fumio Kishida greets US Vice President Kamala in Tokyo. Washington is focused on moving close to partners it can trust.</span> <span class="attribution"><span class="source">Photo by David Mareuil/Pool/Getty Images</span></span></figcaption></figure><p>Over the past few years, the world’s supply chains have been strained and disrupted by the <a href="https://www.bloomberg.com/news/articles/2022-06-22/what-friend-shoring-means-for-the-future-of-trade-quicktake">COVID pandemic, Russia’s invasion of Ukraine, and rising geopolitical tensions</a>. These started with the US-China trade war and then intensified following the war in Ukraine. </p>
<p>In response to the cumulative economic and security fallout that has ensued, some advanced countries are now ramping up efforts to divert their supply chains away from countries that are not like-minded and that don’t have shared common values.</p>
<p>This new supply chain strategy is called “<a href="https://home.treasury.gov/news/press-releases/jy0714">friend-shoring</a>.” Advanced countries are creating friend-shoring alliances which are, in turn, reshaping our global economy. </p>
<p>These shifts have adverse implications for Africa. The approaches to reconfiguring supply chains currently unfolding threaten to heap more stress on a continent already weighed down by multiple crises. </p>
<p>Africa stands to lose out because the current reshaping of supply chains is not intended to shift trade, investments and jobs towards African trade partners. Rather it’s got to do with efforts by the EU and US to insulate their supply chains from being disrupted for geopolitical reasons by less trusted partners with significant global market share in key raw materials, commodities and other essential products.</p>
<p>Steps can be taken to mitigate the negative economic effects that will be imposed on Africa by this supply chain reorientation. These include forging strong and effective friend -shoring alliances with the advanced economies and defending the rules-based multilateral trading system.</p>
<h2>The push for a friend-shoring strategy</h2>
<p>In the US, friend-shoring as a policy goal <a href="https://www.atlanticcouncil.org/news/transcripts/transcript-us-treasury-secretary-janet-yellen-on-the-next-steps-for-russia-sanctions-and-friend-shoring-supply-chains/">was first proposed</a> by Treasury Secretary Janet Yellen in April this year. In her remarks on the way forward for the global economy, she identified friend-shoring of supply chains as a strategy that could achieve two outcomes. Firstly it could securely extend market access. Secondly it could simultaneously lower the risks to the US economy and its trusted trade partners. </p>
<p>Then <a href="https://www.bloomberg.com/news/articles/2022-07-18/yellen-touts-friend-shoring-as-fix-for-global-supply-chains">during a tour</a> of East Asia in July, Yellen sought to promote the US administration’s proposed friend-shoring policy first in Tokyo and later on in a speech delivered in Seoul. She said: </p>
<blockquote>
<p>In so doing, we can help to insulate both American and Korean households from the price increases and disruptions caused by geopolitical and economic risks.</p>
</blockquote>
<p>And during a recent visit to Japan and South Korea, Vice President Kamala Harris emphasised the importance of friend-shoring. Speaking in Tokyo <a href="https://www.bloomberg.com/news/articles/2022-09-28/harris-says-japan-plays-critical-role-in-chips-supply-chain">she said</a>:</p>
<blockquote>
<p>…it is important that we and our allies partner in a way that allows us to grow, and in a way that allows us to function at a very practical level. </p>
</blockquote>
<p>US President Joe Biden has been pushing the same supply-chain strategy in Asia. A centerpiece of the Indo-Pacific Economic Framework he <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/05/23/fact-sheet-in-asia-president-biden-and-a-dozen-indo-pacific-partners-launch-the-indo-pacific-economic-framework-for-prosperity/">unveiled</a> in Asia is bolstering regional supply chains as part of Washington’s efforts to strengthen ties with trusted Asian partners. And to counter China. </p>
<p>The framework is also a big deal for the US because it brings together economies that contribute nearly <a href="https://www.bloomberg.com/news/articles/2022-09-07/us-starts-broad-economic-talks-with-13-nations-to-counter-china">40% of global GDP</a>. Along with the US, its other key members include Australia, India, Japan, South Korea, New Zealand and several Southeast Asian countries.</p>
<p>The Biden administration also unveiled a new <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/08/fact-sheet-u-s-strategy-toward-sub-saharan-africa/">US strategy towards Sub-Saharan Africa</a> in August. But, in sharp contrast to the Indo-Pacific Economic Framework, it does not include any specific and concrete friend-shoring commitments for African countries. And appears mainly to be another counter play against China and Russia—the US’s two top adversaries.</p>
<p>The push to diversify supply chains is also underway in Europe. According to European Central Bank President Christine Lagarde, <a href="https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220422%7Ec43af3db20.en.html">nearly half of companies</a> had diversified their supplier base by the end of 2021. As the world’s largest single market, the EU is able to use its strong regional base to diversify supply chains within the bloc. </p>
<p>While the COVID pandemic certainly played an important role in spurring the shift from dependence to diversification, the war in Ukraine was a tipping point for Europe from an economic and security standpoint. It further intensified the drive to diversify supply lines away from Russian suppliers of critical commodities, especially energy, food, and fertiliser. The strategy is to friend-shore them to countries deemed reliable and with shared strategic interests.</p>
<h2>Africa stands to lose out</h2>
<p>Africa has nothing to gain from the current reshaping of supply chains. This is because US and EU friend-shoring initiatives heavily favour Asian and Indo-pacific partners. Winners from these initiatives include Indonesia, Malaysia, Vietnam and other Indo-Pacific countries deemed to be trustworthy. Their economies will benefit from the boost given to trade, production plants, jobs and investments.</p>
<p>In addition, friend-shoring also threatens to undermine the World Trade Organisation’s <a href="https://www.wto.org/english/tratop_e/devel_e/a4t_e/aid4trade_e.htm">Aid for Trade initiative</a>. This was launched in 2005 to assist developing countries reduce trade costs and thereby enhance export competitiveness. Its significance has steadily increased in the years after it was launched. At this year’s WTO meeting in July, Aid for Trade discussions focused on helping Africa and other developing countries recover and build long-term sustainable development by supporting priority needs they had identified.</p>
<p>These needs include trade facilitation, digital connectivity, export diversification, connecting to value chains, and women’s economic empowerment. They also focused on how environmentally sustainable development can contribute to achieving these priority needs. </p>
<p>Reconfiguring supply chains in ways that exclusively lend a helping hand to current US and EU manoeuvring will only make it more difficult for Africa to benefit from WTO support in these important areas.</p>
<h2>What’s to be done?</h2>
<p>Looking forward, there are at least three essential things that can be done to mitigate negative impacts on Africa. </p>
<p>First, effective friend-shoring alliances should be included as a centerpiece of the new US strategy towards sub-Saharan Africa. African policy makers should strongly urge the Biden administration to do this and demonstrate commitment on their part to be trusted partners. </p>
<p>Second, the EU should also develop an effective friend-shoring strategy with African partners, even as it pushes for an expansion of intra-bloc supply chains. Again, it is paramount that African policy makers take the lead and justify the importance of entering into a strong friend -shoring relationship with the EU. </p>
<p>Finally, defending the rules-based multilateral trading system is important to ensure that it continues to deliver benefits for developing and least developed countries, including those in Africa.</p><img src="https://counter.theconversation.com/content/191270/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Munemo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Africa must focus on building strong alliances with advanced economies to mitigate the steps being taken by the European Union and US.Jonathan Munemo, Professor of Economics, Salisbury UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1737752021-12-15T13:54:42Z2021-12-15T13:54:42ZI’ve fine-tuned a tool that advises the Bank of England what interest rates to set – here’s what it says<p>Interest rates <a href="https://brill.com/view/journals/jesh/43/2/article-p132_2.xml?language=en">were remarkably stable</a> in ancient societies. It has been argued that this was because they reflected the local system of numerical fractions. Classical Greece had a “normal” interest rate of 10% per annum to reflect its smallest fractional unit, <em>dekate</em>, for instance, whereas classical Rome’s was 8.33% per annum to reflect its smallest fractional unit of 1/12th, <em>uncia</em>. </p>
<p>This saved ancient policymakers from the trouble of making interest rate decisions based on the economic outlook. It also spared them from being dubbed “<a href="https://www.theguardian.com/business/live/2021/nov/04/bank-of-england-uk-interest-rates-fed-tapering-inflation-economy-supply-chains-ftse-business-live?page=with:block-6183d3fb8f0833c57fc56398">unreliable boyfriends</a>” by commentators for wrongfooting financial markets with their interest-rate decisions – unlike former Bank of England Governor Mark Carney and his successor, Andrew Bailey. </p>
<p>Bailey was most recently criticised in November when the Bank of England’s Monetary Policy Committee (MPC) <a href="https://www.theguardian.com/business/2021/nov/04/bank-of-england-uk-interest-rates-on-hold-at-01">voted to</a> keep the policy rate of interest on hold at 0.1% despite signalling that it would be raising it to ward off inflation. The MPC’s job is to use interest rates to keep consumer price index (CPI) inflation within its <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23?referrer=search&searchTerm=d7g7">2% target</a> over the next two years, but it is currently expected to remain above that until at least the <a href="https://www.bankofengland.co.uk/monetary-policy-report/2021/november-2021">first quarter of 2024</a>. </p>
<p>The bank’s policymakers decided against raising rates because a majority believe that the current inflationary pressures are, to some extent, temporary. But is that so? US Treasury Secretary Janet Yellen believes inflation will remain high until COVID is <a href="https://www.ft.com/content/989024a6-b3ff-4acf-9a16-20a93c255db0">under control</a>, since the surge in prices is closely linked to problems in the global supply chain which have meant that there is too little supply to meet demand. </p>
<p>In Yellen’s view this means stubbornly high inflation well into 2022, which raises the question of what temporary means – particularly now that the omicron COVID variant will potentially see supply-chain disruption going on even longer.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Janet Yellen with a mask on" src="https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437761/original/file-20211215-21-1wmec5o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US Treasury Secretary Janet Yellen thinks inflation will stay stubbornly hgh.</span>
<span class="attribution"><span class="source">EPA</span></span>
</figcaption>
</figure>
<p>Yet the markets’ bigger concern about omicron is that it is going to hamper economic growth. Economic growth is another (more positive) cause of inflation, so the new variant will potentially reduce the price pressure. For that reason, <a href="https://www.theguardian.com/business/2021/dec/09/markets-think-omicron-plan-b-will-delay-rise-in-uk-interest-rates">market expectations</a> of imminent interest-rate rises have markedly weakened since omicron emerged. Paradoxically, however, delayed interest-rate action will arguably make it more likely that higher inflation (from prolonged supply-chain problems) will ultimately last longer. </p>
<p>To further raise the pressure on the MPC, the annual rate of inflation has just risen <a href="https://www.theguardian.com/business/live/2021/dec/15/uk-inflation-soars-cost-of-living-squeeze-energy-housing-clothing-footwear-federal-reserve-business-live">to 5.1%</a> (up from 4.2% a month ago). The bank’s deputy governor, Ben Broadbent, <a href="https://www.theguardian.com/business/2021/dec/06/uk-inflation-likely-to-exceed-5-in-2022-says-bank-of-england">had predicted</a> recently that the UK wouldn’t hit this rate until the spring. </p>
<p>In this context, the MPC is currently meeting to make its latest decision on interest rates. So what should it do?</p>
<h2>The interest rates predictor</h2>
<p>To help determine this, there is a model called the “monetary policy rule”, originally devised by economist John Taylor at Stanford <a href="http://web.stanford.edu/%7Ejohntayl/Papers/Discretion.PDF">in the 1990s</a>, which takes several important variables into account. The first is the central bank’s two-year inflation forecast – in other words, the <a href="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2021/november/monetary-policy-report-november-2021.pdf">most likely outcome</a> based on market expectations of interest rates – relative to the official inflation target. </p>
<p>The second variable is UK economic growth relative to its long-run equilibrium level – that is, the <a href="https://obr.uk/data/">Office for Budget Responsibility</a> (OBR) “output gap” measure of “excess demand” in the economy. According to the OBR, UK output is currently 0.7% above equilibrium. </p>
<p>To improve the accuracy of the monetary rule during the pandemic, I have incorporated a <a href="https://www.policyuncertainty.com/infectious_EMV.html">third variable</a>, an “infectious disease equity market volatility tracker”. This is an index constructed and updated daily by a team of <a href="https://drive.google.com/file/d/1E9o758AnsJA6DHX4dc_xuvaMoYzDhy4G/view">US economists</a>. It is based on approximately 3,000 US newspaper articles that contain economic terms such as “economy” and “financial”; stock market terms; volatility terms such as “uncertainty” and “risk”; and infectious disease terms such as “epidemic”, “pandemic”, “virus”, “flu” and “coronavirus”. The tracker is not just focused on COVID, and has over 20 years of historical data. </p>
<p><strong>Infectious disease tracker, 1998-2021</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Infectious disease tracker graph" src="https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=318&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=318&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=318&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=400&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=400&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437607/original/file-20211214-15-1ys75s9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=400&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>So how well does this model predict interest-rate decisions? The next chart shows Bank of England interest-rate decisions going back to 1998, alongside what the model would have predicted. As you can see, it does a pretty decent job in explaining the MPC’s interest rate decisions. (Since the disease tracker was at such low levels until the COVID pandemic, its influence on interest rates would have been very small until recently). </p>
<p><strong>UK policy rate decisions vs model predictions</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph plotting UK interest rates against model prediction" src="https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=371&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=371&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437602/original/file-20211214-19-f2ec8x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=371&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>One interesting thing to point out about this model is that it prescribed a negative policy rate of -0.15% for the end of 2020, when the UK was pushed into yet <a href="https://www.instituteforgovernment.org.uk/charts/uk-government-coronavirus-lockdowns">another COVID lockdown</a>. At that time, the MPC decided against a negative interest rate, although it was <a href="https://www.theguardian.com/business/2020/oct/12/bank-of-england-negative-interest-rate-borrowing">certainly an option</a> at the time as a way of encouraging as much lending as possible. Other central banks such as the European Central Bank had already <a href="https://think.ing.com/articles/winners-and-loses-from-ecb-negative-interest-rate-policy">been experimenting</a> with negative rates for some time. </p>
<p>As for the MPC’s upcoming decision, the model is “recommending” a policy rate of 0.2% – in other words, a slight increase from today’s 0.1% rate. Without the disease tracker built in, the model would instead be calling for a 0.5% rate, so it shows how growth fears are weighing on its advice. Of course, if market expectations are correct and the MPC leaves rates unchanged, we will conclude that these fears were weighing on them even more. </p>
<p>The danger with such an approach is that growth fears are potentially being overdone right now. There is evidence that the UK economy has <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3867485">managed to adapt</a> to past COVID restrictions. And the latest annual inflation reading of 5.1% will make it more likely that inflation in two years’ time will be higher than the current 2.2% prediction – putting additional pressure on the MPC to act. </p>
<p>Then again, with the speed at which omicron is moving through the population, the infectious disease tracker could well soon jump back to 2020 levels. Were that to happen, the model would recommend that interest rates remain at 0.1%. It all serves to highlight why it is a very difficult time for the MPC to make a decision, and why, particularly during the pandemic era, it is useful to look at the monetary rule for guidance.</p><img src="https://counter.theconversation.com/content/173775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Costas Milas has received in the past funding by the Bank of England to work, as the principal investigator, on the project “Liquidity and output growth in the UK”.
Costas Milas has received in the past ESRC funding as the principal organiser of an ESRC Seminar Series on Nonlinearities in Economics and Finance. </span></em></p>The “monetary policy rule” tool has been mostly right for the past 20 years.Costas Milas, Professor of Finance, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1585532021-04-07T13:41:43Z2021-04-07T13:41:43ZCorporation tax: why Janet Yellen’s call for a global minimum rate is a bad move<p>The US treasury secretary, Janet Yellen, <a href="https://www.ft.com/content/79023ff2-c629-429c-8a34-16bf68b4ea15">is calling for</a> governments around the world to support the US in setting up a global minimum corporation tax rate. She did not specify a rate but it comes at a time when the US government is <a href="https://www.cnbc.com/2021/03/31/biden-infrastructure-bill-companies-split-on-whether-to-fight-corporate-tax-hike.html">trying to raise</a> the nation’s internal corporation tax rate from 21% to 28%. </p>
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<p>Yellen said that imposing a global minimum would “make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations”, and that it would spur “innovation, growth and prosperity”. </p>
<p>The new US administration has <a href="https://www.capacitymedia.com/articles/3827855/yellen-u-turns-on-us-digital-tax-opposition">already been trying</a> to reach international agreement over a digital tax for online giants such as Amazon and Facebook, pushing for the OECD to reach a deal by the summer. The Economist <a href="https://www.economist.com/finance-and-economics/2021/04/06/janet-yellen-calls-for-a-global-minimum-tax-on-companies-could-it-happen">reckons that</a> Silicon Valley’s “big five” paid just US$220 billion (£159 billion) in <a href="https://www.thetaxcouncil.org/wp-content/uploads/2013/05/Cash-Tax-vs-Book-Tax_final.pdf">cash taxes</a> in the past decade, representing just 16% of their pre-tax profits. </p>
<p>Yet Yellen’s call for a global minimum corporation tax goes much further than this. And in my view it’s a bad idea: it would disadvantage developing countries and is probably not workable anyway. </p>
<h2>A race to the bottom?</h2>
<p>Yellen claims that a global minimum rate will end a “30-year <a href="https://theconversation.com/corporation-tax-race-to-bottom-may-be-ending-after-40-years-heres-why-it-never-made-sense-153662">race to the bottom</a>” – but global practice points to a more mixed picture. <a href="https://taxfoundation.org/publications/corporate-tax-rates-around-the-world/#Findings">In 2020</a>, nine countries across five continents reduced their corporation tax rates by between one (Togo) and five percentage points (Greenland). Within the OECD, <a href="https://taxfoundation.org/publications/corporate-tax-rates-around-the-world/#Findings">several countries have plans</a> to cut their rates in the coming fiscal year or two: France is cutting from 32% to 25%, while Sweden is cutting from 21% to 20%. The Netherlands was also planning a cut, but has since <a href="https://www.ey.com/en_gl/tax-alerts/the-netherlands-publishes-2021-budget-proposals">changed its mind</a>. </p>
<p>Many other countries have kept their rates stable for many years however. Nigeria’s rate has been <a href="https://tradingeconomics.com/nigeria/corporate-tax-rate#:%7E:text=The%20Corporate%20Tax%20Rate%20in%20Nigeria%20stands%20at%2030%20percent.">steady at 30%</a>, while Brazil’s is an <a href="https://tradingeconomics.com/brazil/corporate-tax-rate">unchanging 34%</a>. China’s rate <a href="https://tradingeconomics.com/china/corporate-tax-rate#:%7E:text=Corporate%20Tax%20Rate%20in%20China%20is%20expected%20to%20reach%2025.00,according%20to%20our%20econometric%20models.">has been 25%</a> for more than a decade (but 15% for sectors that the government is trying to encourage, such as certain tech businesses). South Africa’s rate <a href="https://tradingeconomics.com/south-africa/corporate-tax-rate">has been 28%</a> for nearly a decade too, though it is <a href="https://taxsummaries.pwc.com/south-africa/corporate/taxes-on-corporate-income#:%7E:text=In%20South%20Africa%2C%20the%20CIT,or%20after%201%20April%202022.">coming down to 27%</a> in 2022. </p>
<p>Each rate is subject to drivers peculiar to the country in question and its economy, but none of these countries is “racing to the bottom”. Neither are they begging for a global minimum rate. There has been far more interest in a digital corporation tax, with some companies such as India, the Czech Republic, France and Turkey <a href="https://news.bloombergtax.com/daily-tax-report/digital-services-tax-why-the-world-is-watching">already introducing</a> a levy. </p>
<h2>Threat to flexibility</h2>
<p>In developing and developed countries alike, multinationals are a source of foreign direct investment, which makes them attractive to governments. These corporations both hire workers and create many more jobs indirectly through everything from using local contractors to creating demand for consumer goods through the salaries they pay. </p>
<p>Some countries have used their freedom to set corporation tax rates as a way to attract such business. There are examples of low corporation tax regimes around the world, from Ireland (12.5%) to Moldova (12%), from Paraguay (10%) to Uzbekistan (7.5%). In a world where there are huge disparities in the income levels of different countries, a minimum global corporation tax rate could crowd out those who are not especially attractive but for the fact that they can offer lower rates. </p>
<p>For some corporations, it will also raise the cost of doing international business. Take the example of an American corporation with a presence in Ireland. Suppose the global minimum rate was set at 20%: such a company will have to pay 7.5 percentage points more of corporation tax on trading in Ireland than it does at present. Not only does this potentially make Ireland less attractive, it means that the costs will be passed on – be it to the company’s suppliers or its customers or whatever. </p>
<p>More generally, a global minimum rate would remove the flexibility for different nations to pursue policies that best suit them. Take COVID-19, for example. With
<a href="https://blogs.imf.org/2021/03/31/slow-healing-scars-the-pandemics-legacy/">IMF</a> and <a href="https://www.worldbank.org/en/news/press-release/2021/01/05/global-economy-to-expand-by-4-percent-in-2021-vaccine-deployment-and-investment-key-to-sustaining-the-recovery">World Bank</a> data suggesting that developing countries may experience a longer economic hangover than their developed counterparts, Ghana <a href="https://home.kpmg/us/en/home/insights/2021/03/tnf-ghana-tax-provisions-2021-budget.html">recently introduced</a> a 30% tax rebate for companies in sectors such as travel, tourism and hospitality for the rest of 2021. </p>
<p>This is comparable to the <a href="https://www.pinsentmasons.com/out-law/news/uk-budget-2021-corporation-tax#:%7E:text=The%20current%2019%25%20rate%20of,even%20after%201%20April%202023.">UK’s recent announcement</a> that it was deferring a planned increase in corporation tax for several years to encourage business spending. Under a global minimum corporation tax rate regime, will independent nation states be able to proffer such initiatives?</p>
<p>Finally, a global minimum rate will not end creative accounting. Each country’s tax code will still have its own set of complicated exceptions and exemptions, and companies will still pay specialist advisers handsomely to help them make the most of them. A global minimum rate will also do nothing to help with tax evasion, which was <a href="https://www.internationalinvestment.net/news/4024539/global-tax-evasion-costs-usd427bn#:%7E:text=Taxpayers%20around%20the%20world%20lose,group%20the%20Tax%20Justice%20Network.">recently estimated</a> to cost taxpayers almost half a trillion US dollars a year.</p>
<p>In short, Yellen’s proposal is no magic bullet and it’s targeting a problem that is not what it appears. This is a battle that is not worth winning, and it will cause much collateral damage before it comes to an end.</p><img src="https://counter.theconversation.com/content/158553/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sharif Mahmud Khalid does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Not content with swinging behind a global digital tax, now the US treasury secretary wants to put paid to bargain corporation tax rates in general.Sharif Mahmud Khalid, Assistant Professor in Accounting and Financial Management, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1557792021-02-23T12:23:13Z2021-02-23T12:23:13ZWhy Mario Draghi taking charge of Italy is great news for the EU (and also America)<p>The news that Mario Draghi has become prime minister of Italy has been saluted by many commentators as <a href="https://www.ft.com/content/383ec389-3fbe-44c5-bac9-ef61f0248f43">great news</a> for <a href="https://www.economist.com/leaders/2021/02/20/mario-draghi-gives-italy-another-chance">the nation</a>. Italy is in desperate need of a strong guide to save the country from one of its worst crises since the second world war, and the 73-year-old former president of the European Central Bank (ECB) is seen as having all the requisite skills. </p>
<p>Yet while most of the attention has focused on what it means for Europe’s fourth-largest economy, it needs to be acknowledged that Draghi’s appointment is also critical for the EU and the US. Here are four reasons why.</p>
<h2>1. How to recover</h2>
<p>One of Draghi’s new key responsibilities is to redesign the recovery plan that will determine how Italy spends the <a href="https://www.reuters.com/article/us-italy-economy-eu-analysis-idUSKBN2672DX">€209 billion</a> (£180 billion) being provided by the EU in grants and loans over the coming years. A <a href="https://www.ft.com/content/98404792-bc2e-4050-b63f-905afaa91eb8">major criticism</a> of Italy’s previous government led by Giuseppe Conte was the dearth of details on how these resources would actually be allocated and their usage monitored. Draghi’s mission will be to bring the plan to the next level while ensuring its proper execution.</p>
<p>His leadership and direction in this role can be an example for other member states as they decide how to spend their share of the EU’s overall <a href="https://ec.europa.eu/info/strategy/recovery-plan-europe_en">€750 billion recovery fund</a>. Italy is the largest recipient of the fund <a href="https://www.ft.com/content/9fb2f320-6a37-421d-b738-196d3e736bae">together with Spain</a>, but both have poor records in deploying resources from Brussels. Draghi’s world-renowned competence on these matters – in conjunction with the fine political skills he forged leading the ECB – can therefore be crucial for the entire EU as so much of the recovery fund’s success will depend on Italy.</p>
<p>In a possible foretaste of what to expect, Draghi made an <a href="https://www.bloomberg.com/news/articles/2020-08-18/draghi-tells-governments-good-debt-can-save-their-economies">important speech</a> in August 2020 at a Catholic convention in Rimini, Italy. In what was one of very few public appearances since leaving the ECB the previous October, Draghi emphasised the fundamental difference between “good” and “bad” debt.</p>
<p>He explained that only debt used for investment in people, key infrastructure and research is sustainable in the longer term. Conversely, debt used for unproductive purposes – for instance, the eye-watering €10 billion of public money that the airline Alitalia burned <a href="https://www.politico.eu/article/alitalia-airline-too-italian-to-fail/">in the 2008-20 period</a> – would not promote the growth that Italy and the EU desperately need, even borrowed at today’s very low interest rates. This was a crucial lesson that other EU nations will do well to heed. </p>
<h2>2. Stable markets</h2>
<p>In the midst of the pandemic and with a vaccination campaign that is <a href="https://www.bbc.co.uk/news/explainers-52380823">lagging behind</a> rival economies, the EU cannot afford to have Italy at the brink of a financial crisis anytime soon. Draghi’s superior knowledge and understanding of financial markets are therefore another reason that he is the ideal leader to take Italy’s helm in these turbulent times. </p>
<p>His success as ECB president, especially his key role in overcoming the <a href="https://www.thebalance.com/eurozone-debt-crisis-causes-cures-and-consequences-3305524">European sovereign debt crisis</a> of 2010-12, is a strong signal to the markets that Italy is in the safest possible hands. Since his appointment, the gap (or spread) between the rates at which Germany and Italy can borrow has duly shrunk to around 90 basis points, at -0.43% and 0.48% respectively, which is the lowest <a href="https://www.reuters.com/article/eurozone-bonds/update-1-italys-10-year-bond-yields-hit-new-record-low-on-hopes-for-draghi-govt-idUSL1N2KI0DI">in over a decade</a>. Assuming this stability continues, it will benefit the whole bloc. </p>
<p><strong>Italian/German ten-year bond spread</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph of spread between German and Italian ten-year bond spreads" src="https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/385623/original/file-20210222-13-ymwf5f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The y-axis represents basis points, which are each a hundredth of a percentage point.</span>
<span class="attribution"><a class="source" href="https://www.borsaitaliana.it/obbligazioni/spread/italia/btp-bund.en.htm">Borsa Italiana</a></span>
</figcaption>
</figure>
<h2>3. Foreign investment</h2>
<p>The EU desperately needs to attract foreign investments to remain competitive. A new UN report <a href="https://unctad.org/webflyer/global-investment-trend-monitor-no-38">has confirmed</a> that global foreign investment plummeted 42% in 2020 to US$859 billion (£611 billion), and the damage was very uneven. Inflows into developing Asia only fell 4%, while the US fell 50% and the EU fell two-thirds. Germany registered a 60% drop, France 40%, while for Italy the drop was even higher than 100% – in other words, inflows dropped into negative territory, mainly due to large divestments by international companies. Conversely, Chinese inflows rose 4% year on year, while India’s were up 13%.</p>
<p>To remain competitive in the global competitive landscape, the EU therefore urgently needs to attract more investment from abroad. This will be fundamentally driven by the stability of the market and its future economic outlook. There is no better leader than Draghi to set the direction on how to regain international competitiveness while reassuring foreign investors on the future of Italy and, in turn, the EU.</p>
<h2>4. American re-engagement</h2>
<p>To counter China’s global ambitions, President Biden will need to revitalise the partnership with the EU after the <a href="https://www.robert-schuman.eu/en/european-issues/0545-the-state-of-the-transatlantic-relationship-in-the-trump-era">tensions of</a> the Trump era. With Angela Merkel soon to step down, Emmanuel Macron facing elections early in 2022, and Britain off the EU stage, Draghi will be a crucial American ally for Biden in the EU. </p>
<p>Major issues will include managing the trade relationships between the US and the EU in the aftermath of <a href="https://www.cnbc.com/2021/01/06/china-eu-trade-deal-what-it-is-and-why-it-might-fail.html">the new EU-China investment deal</a> that was announced just weeks before Biden arrived at the White House. And helping to resolve the trade tensions in relation to <a href="https://www.bbc.com/news/business-54877337">the long-running fight</a> over state subsidies between Boeing and European rival Airbus. </p>
<p>Draghi is very popular in the US and has often been considered as the most American among European bankers. This is partly because of his days as Goldman Sachs’ vice president, but mainly because of his strong partnership with Janet Yellen when the two were the world’s most powerful central bankers during the crisis-ridden 2010s. Following <a href="https://home.treasury.gov/news/press-releases/jy0002">Yellen’s appointment</a> as the US secretary of the treasury in January 2021, the US can again count on this duo. </p>
<p>For all these reasons, we should not underestimate how important Draghi at Italy’s helm can be for both the EU and the US at such a difficult moment for the global economy.</p><img src="https://counter.theconversation.com/content/155779/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Niccolò Pisani does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The former European Central Bank supremo has been generally seen as a good hire for Italy, but there are also global issues at play.Niccolò Pisani, Professor of Strategy and International Business, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1543182021-02-22T13:27:47Z2021-02-22T13:27:47ZBiden’s Cabinet of many women shows other world leaders that US takes gender equality seriously<figure><img src="https://images.theconversation.com/files/385114/original/file-20210218-19-1gd0keu.jpg?ixlib=rb-1.1.0&rect=6%2C41%2C4652%2C2891&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Joe Biden has more top advisers who are women than any other U.S. president. They include Vice President Kamala Harris and Treasury Secretary Janet Yellen.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com.mx/detail/fotografía-de-noticias/president-joe-biden-sits-alongside-us-vice-fotografía-de-noticias/1231065026?adppopup=true">Saul Loeb/AFP via Getty Images</a></span></figcaption></figure><p>President Joe Biden’s Cabinet is the <a href="https://www.washingtonpost.com/politics/2021/01/15/biden-will-have-more-women-his-cabinet-than-any-president-ever-other-countries-still-do-better/">most diverse in U.S. history</a>. </p>
<p>It has <a href="https://www.npr.org/2021/01/25/959602615/janet-yellen-confirmed-by-senate-making-history-as-first-female-treasury-secreta">five women</a>, including the <a href="https://www.npr.org/2021/01/25/959602615/janet-yellen-confirmed-by-senate-making-history-as-first-female-treasury-secreta">first female treasury secretary, Janet Yellen</a>, and Deb Haaland, who will <a href="https://www.washingtonpost.com/climate-environment/2020/12/24/native-americans-haaland/">become the first Native American Cabinet member if confirmed</a> as interior secretary. Secretary of Transportation Pete Buttigieg is the <a href="https://www.npr.org/sections/president-biden-takes-office/2021/02/02/963217201/pete-buttigieg-confirmed-as-transportation-secretary">first openly gay man</a> to win Senate confirmation and lead a Cabinet department. </p>
<p>Four of Biden’s 15 Cabinet nominees identify as Latino or Black. They also span generations, ranging in age from 39 to 74.</p>
<p>The composition of Biden’s Cabinet matters because <a href="https://theconversation.com/how-age-diversity-in-a-presidential-cabinet-could-affect-policies-and-programs-152940/%22%22">research shows</a> that diverse teams can provide chief executives with valuable information that ultimately produces more effective public policies. In building a Cabinet that, in his words, “<a href="https://www.usatoday.com/story/opinion/2020/06/10/biden-root-out-systemic-racism-not-just-divisive-trump-talk-column/5327631002/">looks like America</a>,” Biden also sends signals to Americans of many backgrounds: People like you determine the country’s direction. People like you can make it to the top.</p>
<p>The Biden administration’s diverse leadership may send a message to the world, too.</p>
<p>Our work on <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/gove.12044">gender inclusion and Cabinet picks</a> suggests that when world leaders – particularly those in powerful countries – appoint more gender-balanced Cabinets, other world leaders may become more likely to name women for key posts.</p>
<h2>Cabinet selection</h2>
<p>In any given country, domestic factors – from how the electoral system is set up to what the executive’s relationship is with the legislature – primarily drive Cabinet selection. Generally speaking, heads of government select their Cabinet members for their expertise and to shore up support among domestic constituencies, not to gain international celebration. </p>
<p>But even controlling for domestic factors, world leaders who broadcast the idea that gender equality matters can affect the decision-making of other leaders.</p>
<p>For example, in October 2018, Ethiopian Prime Minister Abiy Ahmed made international headlines by presenting a gender-balanced Cabinet. Days later, Rwandan President Paul Kagame <a href="https://www.independent.co.uk/news/world/africa/rwanda-cabinet-women-gender-balance-government-africa-ethiopia-a8592461.html">upped the number of women</a> in his own Cabinet. </p>
<p>The period between Ethiopia’s and Rwanda’s announcements was particularly quick, but such processes – where heads of government follow the lead of their neighbors – are not uncommon. Having a neighboring country with an above-average percentage of women Cabinet ministers is associated with an 8% increase in female Cabinet ministers in nearby nations, our research shows.</p>
<p>Shared membership in international organizations with strong gender equality standards, like the European Union, also seems to increase the importance leaders attach to gender. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Group photo of Spanish cabinet standing on white steps with Sanchez in middle, surrounded by a gender-diverse group" src="https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/385117/original/file-20210218-16-uera6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Half the Cabinet ministers appointed by Spanish Prime Minister Pedro Sanchez are women.</span>
<span class="attribution"><a class="source" href="https://upload.wikimedia.org/wikipedia/commons/2/29/Segundo_Gobierno_de_Pedro_S%C3%A1nchez_%282020-01%29.jpg">Pool Moncloa/Fernando Calvo via Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Our analysis finds that if a country belongs to two international organizations in which 50 other members have above-average percentages of women ministers, its own percentage of women ministers rises by 1 percentage point. The same is true of countries that belong to four international organizations in which 25 other members have more female ministers than most. </p>
<p>Getting more women into government leadership has merits beyond the obvious value of gender equality. </p>
<p>Countries with more women’s political representation tend to experience less <a href="https://academic.oup.com/isq/article-abstract/49/4/695/1813634?redirectedFrom=fulltext">civil conflict</a>, <a href="https://www.journals.uchicago.edu/doi/10.1017/S0022381610000824">international war</a> and <a href="https://stevenpinker.com/publications/better-angels-our-nature">gender-based violence</a>. </p>
<p>It’s not yet clear whether women’s representation causes these phenomena or is merely correlated with them; political scientists continue to study this question. </p>
<p>Countries that prioritize women’s equality in politics also tend to do more to protect <a href="https://freedomhouse.org/report/freedom-world">civil liberties</a> and safeguard <a href="https://journals.sagepub.com/doi/10.1177/0022343305050688">human rights</a>. South Africa’s 1996 constitution not only steered the country away from apartheid and toward an embrace of human rights – it also institutionalized gender equality as a principle. </p>
<p>In South Africa and elsewhere, the pillars of inclusion reinforce each other. </p>
<h2>Representational messages beyond the Cabinet</h2>
<p>Biden’s Cabinet members aren’t the only group of government officials that will receive international scrutiny. <a href="https://journals.sagepub.com/doi/full/10.1177/1354066116681429?casa_token=qlTRhFI2I4EAAAAA%3AeL19GK9TZwJSAJBr4F-osso94rrcjaOiTpU6I2D3phSu5pZdC-F3pOX6cWHLujSbUf4_76Of6dpgLUQ">Our research on ambassadors</a> suggests that world leaders will also pay attention to the envoys that Biden sends abroad. </p>
<p>Countries that commit to gender equality appoint more women ambassadors. Take, for example, Sweden – a vocal proponent of ensuring women’s participation in foreign affairs – and China. Almost 40% of <a href="https://ecpr.eu/Filestore/PaperProposal/8db1a913-e843-402a-ac54-cf2d4e813772.pdf">Sweden’s 103 ambassadors</a> are women, while fewer than 7% of China’s 165 ambassadors are. </p>
<p>The converse also seems to be true: Countries that prioritize gender equality receive more female ambassadors. Among the 133 governments that send ambassadors to both China and Sweden, 44 dispatch a woman to Stockholm – but only 12 dispatch a woman to Beijing.</p>
<p>Governments that are more dependent on international aid seem particularly keen to factor donor countries’ decision-making into their own political appointments. The 37 countries that the World Bank classifies as particularly <a href="https://data.worldbank.org/country/XE">deep in debt</a> – a group that includes countries like Ethiopia and Bolivia – dispatch four times more women to Washington than they do to Beijing.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>In the short term, Biden’s attention to gender balance in his administration increases the likelihood that leaders of other countries will similarly diversify their executive staffs. </p>
<p>In the longer term, continued American commitment to gender balance could strengthen equality and peace worldwide.</p><img src="https://counter.theconversation.com/content/154318/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows that when one country – particularly a powerful one – puts more women in power, other nations tend to follow suit.John Scherpereel, Professor of Political Science, James Madison University Melinda Adams, Professor of Political Science, James Madison University Suraj Jacob, Visiting Faculty, Azim Premji UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1548192021-02-11T19:04:35Z2021-02-11T19:04:35ZVital Signs: What if Biden’s $1.9 trillion stimulus plan is too big?<p>It’s not often centre-left economists disagree with each other – let alone get into a stoush. But it’s what happened over the last week.</p>
<p>On February 5 former US Treasury Secretary and National Economic Council Chair Larry Summers <a href="https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/">published an opinion piece</a> suggesting the Biden administration’s US$1.9 trillion bill might be “too big”.</p>
<p>MIT economics professor and former International Monetary Fund chief economist Olivier Blanchard <a href="https://twitter.com/ojblanchard1/status/1357789090792488971">backed Summers</a> on twitter, saying </p>
<blockquote>
<p>I am known as a dove [one who supports low interest rates and generous government assistance] I believe that the absolute priority is to protect people and firms affected by COVID. Still, I agree with Summers. The $1.9 trillion program could overheat the economy so badly as to be counterproductive. Protection can be achieved with less.</p>
</blockquote>
<p>This all caused a good deal of consternation within the Biden administration, and led the current Treasury Secretary Janet Yellen to <a href="https://www.bloomberg.com/multimedia/api/embed/iframe?id=71a79a7c-23ef-4eb7-b3b9-487940eb473a">push back hard</a>, saying “we are in a huge hole with respect to the job market”.</p>
<p>Former Chair of the Council of Economic Advisers Austan Goolsbee <a href="https://www.nytimes.com/2021/02/03/business/coronavirus-relief-spend-big.html">backed Yellen and Biden</a>, saying</p>
<blockquote>
<p>further delay in approving a larger relief program would be a mistake. That ‘wait and see’ approach has proved to be deeply wrong since the pandemic began. The issue is what I have called the No. 1 rule of virus economics: If you want to help the economy, you have to stop the virus.</p>
</blockquote>
<p>So who’s right?</p>
<h2>The case for restraint</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1219&fit=crop&dpr=1 754w, https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1219&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/383689/original/file-20210211-17-1rg9ek8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1219&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Biden’s plan is big.</span>
<span class="attribution"><span class="source">STEFANI REYNOLDS/EPA</span></span>
</figcaption>
</figure>
<p>The core of Summers’ argument is that, according to the Congressional Budget Office, the economy is running <a href="https://www.cbo.gov/publication/56965">$50 billion a month below it’s potential</a>, an output gap that will decline to $20 billion a month over the course of the year.</p>
<p>The improvement is in part because of a $900 billion package approved in December under the Trump administration.</p>
<p>Summers points out the Biden administration’s extra $1.9 trillion package would be three times larger than the projected shortfall in output. </p>
<p>As a result, it would “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the dollar and financial stability”.</p>
<p>As well, a package so large might preclude the future spending on infrastructure and productivity-enhancing measures that will be needed to overcome the sluggish growth (“<a href="http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/">secular stagnation</a>”) identified by Summers before COVID-19.</p>
<h2>The case for bold action</h2>
<p>Those who support the Biden plan argue it isn’t a traditional stimulus package of the kind Obama enacted in 2009 to get the economy out of recession. COVID is more like a natural disaster. </p>
<p>The spending package is akin to disaster relief, and it’s unwise to skimp on disaster relief.</p>
<p>That said, about a quarter the $1.9 trillion will be spent on sending <a href="https://www.cnet.com/personal-finance/senate-approves-budget-for-1-point-9-trillion-dollar-covid-relief-package/">$1,400 cheques</a> to individuals, on top of the $600 cheques sent as part of the earlier package. That part looks more like a traditional stimulus measure than disaster relief.</p>
<h2>So, who’s right?</h2>
<p>The central controversy is whether the <a href="http://www.crfb.org/blogs/america-faces-380-billion-output-gap">output gap</a> is large enough to accommodate the Biden spending without undue inflationary pressure. </p>
<p>Financial journalist Matt Yglesias has looked to <a href="https://www.slowboring.com/p/full-employment">the markets</a> for an answer.</p>
<p>He points out that</p>
<blockquote>
<p>because the government sells both regular bonds and inflation-protected bonds, if you look at the difference between the interest rate on a regular bond and the interest rate on an inflation-protected bond, you get a market estimate of how much inflation is expected in the future</p>
</blockquote>
<p>The resulting graph shows inflation expectations have moved back into the Federal Reserve’s target band of 2-3%. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=254&fit=crop&dpr=1 600w, https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=254&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=254&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=319&fit=crop&dpr=1 754w, https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=319&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/383685/original/file-20210211-23-zswch4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=319&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://fred.stlouisfed.org/series/T5YIE/">Federal Reserve Bank of St. Louis</a></span>
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</figure>
<p>What this means depends on what the market thinks will happen to the package.</p>
<p>If it thinks the full package will be enacted, it looks like an endorsement. The package should be enough to get inflation back to the target, but not enough to accelerate it beyond that.</p>
<p>But if it thinks only a fraction will be enacted – maybe half or two-thirds – but what turns out to be enacted is the full package, it might mean the market expects inflation to run out of control, just as Summers and Blanchard suggest.</p>
<p>So the markets provides clues, but no answer. It will give us a better steer when we are certain how much of the package will become a reality.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/joe-biden-sends-a-clear-message-to-the-watching-world-americas-back-153698">Joe Biden sends a clear message to the watching world – America’s back</a>
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</p>
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<p>For now, it’s hard to tell who’s right: Summers and Blanchard, or the Biden administration.</p>
<p>Given that the US Federal Reserve would put the brakes on inflation if it did start to take off, it’s probably wisest to back Biden and run the risk of spending too big rather than too small.</p><img src="https://counter.theconversation.com/content/154819/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For once, centre-left economists are divided.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1536472021-01-21T18:53:32Z2021-01-21T18:53:32ZVital Signs: Biden’s economic centrism isn’t exciting, but right for these divisive times<p>In an age of hyperpartisan politics, the Biden presidency offers a welcome centrism that might help bridge the divides.</p>
<p>But it is also Biden’s economic centrism that offers a chance to cut through what has become an increasingly polarised approach to economic policy.</p>
<p>On the Republican side of politics, there is strong support for neoliberal economic policies – that is, economic policies that don’t just emphasise the importance of markets but represent a kind of free-market fanaticism. Ronald Reagan aptly expressed this view in his <a href="https://www.reaganfoundation.org/ronald-reagan/reagan-quotes-speeches/inaugural-address-1/">1981 inaugural speech</a>, in which he said “government is not the solution to our problem, government is the problem”.</p>
<p>On the Democratic side, the centrism of the Bill Clinton era (1993- 2001) has given way to much more left-wing policies. Indeed the democratic socialism of Bernie Sanders and Alexandria Ocasio-Cortez have been in the ascendancy for several years.</p>
<p>If you have any doubt about this, consider two facts. </p>
<p>First, Sanders came very close to being the Democratic Party’s presidential nominee in 2016. Second, the 2020 Democratic presidential primaries were dominated by candidates with similar views – such as Senator Elizabeth Warren.</p>
<p>Biden, of course, ran on a much more centrist economic platform. </p>
<p>This was perhaps best captured by his approach to health care – seeking to build on Obamacare (the Affordable Care Act) and insure more people, rather than adopt the “<a href="https://berniesanders.com/issues/medicare-for-all/">Medicare for All</a>” policy advocated by Sanders and Warren.</p>
<p>In a whole range of areas Biden and his nominees for important cabinet posts have signalled the new administration’s economic policies will be responsive to the demands of the left but still be sensitive to the concerns of the right. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whos-who-in-joe-bidens-cabinet-152252">Who’s who in Joe Biden’s cabinet</a>
</strong>
</em>
</p>
<hr>
<h2>Big spending, but within limits</h2>
<p>One of the most important things the administration will do in its early days is to orchestrate a large spending package to help deal with the fallout of the coronavirus pandemic. </p>
<p>This will include spending on the vaccine roll-out, helping schools reopen, extending unemployment insurance and cheques to households.</p>
<p>So the spending package is likely to be huge. But the administration is not going to spend with complete abandon and without acknowledging constraints.</p>
<p>As Biden’s pick for Treasury Secretary, Janet Yellen, said in her <a href="https://www.rev.com/blog/transcripts/janet-yellen-opening-statement-transcript-at-confirmation-hearing">confirmation hearing</a>:</p>
<blockquote>
<p>Neither the president elect, nor I, proposed this release relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who’ve been struggling for a very long time.</p>
</blockquote>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-janet-yellen-the-very-model-of-a-modern-madam-secretary-150836">Vital Signs: Janet Yellen, the very model of a modern Madam Secretary</a>
</strong>
</em>
</p>
<hr>
<h2>Treading cautiously on health care</h2>
<p>Sanders and others’ “Medicare for All” plan involves single-payer (i.e. the government) universal coverage and <a href="https://www.bloomberg.com/news/articles/2019-07-05/harris-keeps-tripping-up-on-her-medicare-for-all-fuzziness">ending private health insurance</a>. This would be similar to the approach in Scandinavia, Canada and Britain.</p>
<p>Biden has strongly resisted this on two fronts. </p>
<p>One, it would be incredibly expensive, <a href="https://www.cnbc.com/2020/03/10/biden-says-he-wouldd-veto-medicare-for-all-as-coronavirus-focuses-attention-on-health.html">costing</a> US$30-40 trillion over a decade. Two, it would involve more than 150 million Americans losing their current insurance.</p>
<p>Instead, Biden wants to expand the Affordable Care Act with more incentives to push towards truly universal coverage. This is something Mitt Romney (the Republicans’ 2012 presidential candidate) might easily have proposed. Don’t forget that as governor of Massachusetts (from 2003 to 2007) he enacted a plan almost identical the Affordable Care Act – an idea championed by the conservative <a href="https://www.forbes.com/sites/johngoodman/2016/02/15/where-did-the-idea-of-obamacare-come-from-a-defense-of-the-heritage-foundation/?sh=1afbc76c4170">Heritage Foundation</a>.</p>
<h2>Likewise with tax reform</h2>
<p>Biden’s tax plan certainly involves raising taxes but not to anywhere near the levels called for by the democratic socialist wing of his party. Nor will he embrace a wealth tax like Warren championed. Under her plan, people with assets of more than US$50 million would be taxed 2% of that amount a year (and 3% for more than US$1 billion).</p>
<p>But he does plan to raise the top income tax rate (on income more than US$400,000) from <a href="https://taxfoundation.org/joe-biden-tax-plan-2020/">37% to 39.6%</a>. He will raise the flat 21% corporate tax rate introduced by Trump to 28%.</p>
<p>US companies will need to pay a minimum tax of 21% on foreign income – addressing the issue of companies avoiding taxes through legal set-ups in low-tax overseas jurisdictions (such as <a href="https://itep.org/fact-sheet-apple-and-tax-avoidance/">Apple in Ireland</a>). </p>
<p>Biden will even introduce a tax penalty on companies that move jobs overseas if their products are sold in the US.</p>
<p>This is not a package any Republican administration would be likely to introduce. On the other hand, it falls dramatically short of what Sanders, Warren and Ocasio-Cortez want.</p>
<h2>Responsive but responsible</h2>
<p>The Biden economic plan is responsive to the current – almost shocking – state of the US economy. His health care and tax policies are sensitive to concerns about inequality.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/joe-biden-sends-a-clear-message-to-the-watching-world-americas-back-153698">Joe Biden sends a clear message to the watching world – America’s back</a>
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</em>
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<hr>
<p>His approach acknowledges, rightly, that with interest rates at historic lows there is room for considerably more spending than in the past, despite already huge deficits. But it also acknowledges there are limits to what the government can or should do. </p>
<p>In that sense it is something even conservative Republicans ought to be able to live with – and common ground is something the US desperately needs to find.</p><img src="https://counter.theconversation.com/content/153647/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Joe Biden’s middling economic policies are a chance to cut through the bitter polarisation of US politics.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1534532021-01-19T19:24:15Z2021-01-19T19:24:15ZJanet Yellen as US Treasury secretary can move the needle on climate change – here’s how<figure><img src="https://images.theconversation.com/files/379328/original/file-20210118-13-1k71gvn.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5014%2C3337&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Senate voted 84-15 to confirm former Federal Reserve Chair Janet Yellen as the next U.S. Treasury secretary.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FederalReserve/82e3c5eb8ac543dda3726db9ab3c6a0c/photo">AP Photo/Jacquelyn Martin</a></span></figcaption></figure><p>U.S. Treasury Secretary Janet Yellen’s in-box will need every ounce of her vast experience to pilot the economy through a daunting confluence of challenges.</p>
<p>How the U.S. manages the economic recovery from COVID-19, the financial risks from climate change and inequality will determine the chances of American prosperity over the coming decades. </p>
<p>First, Yellen will need to ensure that economic stimulus packages produce a job-rich recovery from the COVID-19 pandemic. She can help guide the U.S. to <a href="https://www.mckinsey.com/business-functions/sustainability/our-insights/how-a-post-pandemic-stimulus-can-both-create-jobs-and-help-the-climate">the sweet spot</a> of immediate growth that also puts the country on the path toward a cleaner, more resilient future. This means measures that steer investment and job creation in the sectors of the future, including clean energy, energy efficiency, clean transport and resilient agriculture.</p>
<p>Second, she will have a crucial role in orchestrating <a href="https://theconversation.com/biden-plans-to-fight-climate-change-in-a-way-no-u-s-president-has-done-before-152419">a total government approach</a> to climate risk and resilience. That includes working across every department and agency involved in the regulation, policy and management of financial markets and the economy.</p>
<p>Third, COVID-19 has revealed the extent of the nation’s lack of resilience. With climate shocks only expected to intensify, Yellen’s role in the nation’s recovery also means <a href="https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp012313">confronting inequality</a>.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1336071689583665152"}"></div></p>
<p>Yellen, <a href="https://www.brookings.edu/experts/janet-l-yellen/">a former Federal Reserve chair and professor of economics</a>, is respected by her peers and international financial institutions, and she will be in a position to persuade banks and businesses to take climate change seriously. But there will be no honeymoon. </p>
<p>I have been involved in international sustainable development and climate diplomacy for years as <a href="https://fletcher.tufts.edu/people/rachel-kyte">a former World Bank vice president and senior U.N. official</a>, and I see several ways <a href="https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=117&session=1&vote=00006">Yellen</a> can use the power of the U.S. Treasury to lay the foundation for real and lasting progress on climate change.</p>
<h2>Finding a way to put a price on carbon</h2>
<p>The good news is that Yellen has a keen understanding of the issues surrounding climate change and their interplay, and the roles that financial regulators and economic leaders can play.</p>
<p>For example, she is sensitive to the need to put a <a href="https://www.carbonpricingleadership.org/what">price on carbon</a> pollution to help curb emissions. The cost of that pollution today is borne by the public, from bad air quality to extreme weather and sea level rise. A carbon price, coupled with incentives and standards, will speed up the drive to clean technologies by making polluting expensive for companies and risky for their investors.</p>
<p>During her <a href="https://www.finance.senate.gov/hearings/hearing-to-consider-the-anticipated-nomination-of-to-be-the-honorable-janet-l-yellen-to-secretary-of-the-treasury">confirmation hearing</a>, Yellen talked about climate change as a priority, describing it as an existential threat and a risk to the financial system. In response to senators’ questions, <a href="https://www.finance.senate.gov/imo/media/doc/Dr%20Janet%20Yellen%20Senate%20Finance%20Committee%20QFRs%2001%2021%202021.pdf">she wrote</a> that she believes “we cannot solve the climate crisis without effective carbon pricing” and that President Joe Biden “supports an enforcement mechanism that requires polluters to bear the full cost of the carbon pollution they are emitting.” </p>
<p>Last year, she said that she could see a way forward with <a href="https://www.reuters.com/article/us-usa-climate-tax/u-s-could-adopt-carbon-tax-under-a-biden-presidency-ex-fed-chair-yellen-says-idUSKBN26T23L">bipartisan support for a carbon tax</a> that charges polluters for their carbon emissions and redistributes the proceeds to Americans in quarterly payments, a move that would help low-income residents in particular as the world shifts to cleaner energy. After years leading the <a href="https://clc.fi/">Climate Leadership Coalition</a>, a bipartisan platform advocating for effective carbon pricing, she has the credibility to engineer progress on such a hot-button issue.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=424&fit=crop&dpr=1 600w, https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=424&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=424&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=532&fit=crop&dpr=1 754w, https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=532&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/379197/original/file-20210118-19-16h0it6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=532&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Global carbon emissions.</span>
<span class="attribution"><a class="source" href="https://ourworldindata.org/co2-emissions">Our World in Data</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>More of her views can be seen in the recommendations of a task force Yellen co-chaired in 2020 with Mark Carney, the former head of the Bank of England, for the economic think tank the G30. The <a href="https://group30.org/images/uploads/publications/G30_Mainstreaming_the_Transition_to_a_Net-Zero_Economy.pdf">task force recommended</a> that to achieve net-zero emissions, all countries need to price carbon appropriately; shift incentives for companies and their executives so sustainability is a priority; and harness markets to speed up the rate of transition away from fossil fuels.</p>
<p>The task force also recommended that countries set up <a href="https://group30.org/images/uploads/publications/G30_Mainstreaming_the_Transition_to_a_Net-Zero_Economy.pdf">Carbon Councils</a>, independent government bodies that would “supervise and oversee markets to ensure the delivery of real, positive planetary outcomes and dramatically lowered greenhouse gas emissions.</p>
<p>That advice may be redundant with the appointment of <a href="https://twitter.com/dfarber/status/1351222442275065859">Gina McCarthy</a> in the new role of national climate advisor.</p>
<h2>Bringing climate risk awareness to the financial system</h2>
<p>Yellen has an important role to play and a mechanism already at hand: the <a href="https://www.treasury.gov/initiatives/Documents/FAQ%20-%20FinancialStabilityOversightCouncilOctober2010FINALv2.pdf">Federal Stability Oversight Council</a>. It was created by the 2010 <a href="https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm">Dodd-Frank Wall Street Reform and Consumer Protection Act</a> to identify risks to U.S. financial stability and respond to emerging threats. The council is chaired by the Treasury secretary and comprises all major federal financial regulators. This is a place where Yellen can insert climate risk awareness into the U.S. finance’s central nervous system.</p>
<p>In the past few years, other countries’ central banks have both introduced <a href="https://www.bankofengland.co.uk/paper/2019/biennial-exploratory-scenario-climate-change-discussion-paper">climate-risk stress tests</a> to determine financial institutions’ vulnerability to climate change and imposed rules around exposure to fossil fuels. The U.S. lags, but there is momentum for Yellen and the FSOC to build on.</p>
<p>The Federal Reserve has already <a href="https://www.federalreserve.gov/publications/files/financial-stability-report-20201109.pdf">identified climate change as a risk</a> to financial stability, and in December, it joined the <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201215a.htm">Network for Greening the Financial System</a>, a global leadership group of central banks and financial regulators.</p>
<h2>Using international aid to rebuild soft power</h2>
<p>Yellen will also be coordinating efforts across the government to most effectively manage U.S. global financial engagement on climate change and other risks.</p>
<p>She has unique reach through international finance. The Treasury Department can influence <a href="https://www.usaid.gov/">USAID</a>, which provides aid to countries in need; the <a href="https://www.mcc.gov/">Millennium Challenge Corp.</a>, which supports economic development to reduce poverty; the <a href="https://www.exim.gov/">Export-Import Bank</a>, which provides financing to boost U.S. exports; the <a href="https://ustda.gov/">U.S. Trade and Development Agency</a>, which helps connect U.S. companies with infrastructure projects overseas; and the potentially powerful <a href="https://www.dfc.gov/">International Development Finance Corp.</a> In the right hands, the tools of the DFC can help channel funding to green and resilient infrastructure in low-income countries.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>Financing climate-friendly projects could help the U.S. reclaim both <a href="https://www.foreignaffairs.com/reviews/capsule-review/2004-05-01/soft-power-means-success-world-politics">soft power</a> overseas and its international climate leadership. However, support for pandemic recovery and climate resilience cannot mire low- and middle-income countries in more debt. The debt crisis, worsened by COVID-19, demands careful choreography among international financial institutions, European allies, China, central banks and private financiers. And it will need some fresh thinking. </p>
<p>The Treasury secretary’s in tray is daunting in its complexity. There’s a lot riding on <a href="https://soundcloud.com/doomtree/whos-yellen-now">Janet Yellen’s</a> shoulders, head and heart.</p>
<p><em>This article has been updated with the Senate <a href="https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=117&session=1&vote=00006">voting 84-15</a> to confirm Yellen as U.S. Treasury secretary.</em></p><img src="https://counter.theconversation.com/content/153453/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Kyte does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The former Federal Reserve chair has the experience and broad respect to get businesses to move on climate change and to lay the foundation for real and lasting progress.Rachel Kyte, Dean of the Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1509352020-11-27T01:28:08Z2020-11-27T01:28:08ZBiden’s cabinet picks are globally respected, but one obstacle remains for the US to ‘lead the world’ again<figure><img src="https://images.theconversation.com/files/371648/original/file-20201127-23-1piyhdm.jpg?ixlib=rb-1.1.0&rect=960%2C40%2C4469%2C3573&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Carolyn Kaster/AP</span></span></figcaption></figure><p>The “team of rivals” was the term historian Doris Kearns Goodwin <a href="https://www.amazon.com.au/Team-Rivals-Doris-Kearns-Goodwin/dp/0743270754">used</a> to describe US President Abraham Lincoln’s cabinet. It included three men who had run against Lincoln for the Republican nomination for president in 1860: William Seward (secretary of state), Salmon Chase (treasury secretary) and Edward Bates (attorney general). </p>
<p>Appointing these strong-willed figures could have been disastrous were it not for Lincoln’s personal qualities. </p>
<p>Goodwin describes how Lincoln was willing to acknowledge when policies failed and change direction. He gathered facts on which to base decisions. He sought compromise but took full responsibility for his decisions, respected his colleagues and set an example of dignity. (In all these, he sounds like the antithesis of Donald Trump.)</p>
<p>President-elect Joe Biden has taken a different approach to filling out his cabinet so far. Aside from choosing <a href="https://theconversation.com/who-is-kamala-harris-joe-bidens-pick-for-vice-president-144122">Kamala Harris</a> as his vice president, he’s looked past his main Democratic rivals for the nomination — Elizabeth Warren, Bernie Sanders — and appointed mainly technical experts with relevant experience and an international outlook. </p>
<p>Biden may have seen these more technocratic appointments as fitting with his less partisan style. It also sends a signal to the world that the US wants to reengage. </p>
<p>In Biden’s words, the US is “<a href="https://www.ft.com/content/e9f7fc88-7f08-43af-976c-9b164cf32ed8">ready to lead the world, not retreat from it</a>”. And as <a href="https://2009-2017.state.gov/r/pa/ei/biog/189469.htm">Linda Thomas-Greenfield</a>, the new UN ambassador put it, “multilateralism is back”.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371649/original/file-20201127-23-fbyfc9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Linda Thomas-Greenfield is a career diplomat and former ambassador to Liberia.</span>
<span class="attribution"><span class="source">AHMED JALLANZO/EPA</span></span>
</figcaption>
</figure>
<h2>Team of talent</h2>
<p>Biden may not have filled his cabinet with rivals, but he has also not surrounded himself with clones or an “echo chamber”. He <a href="https://www.cnbc.com/2020/11/24/bidens-foreign-policy-team-lays-out-a-national-security-vision-that-differs-sharply-from-trumps-.html">made clear</a> he wanted his cabinet to </p>
<blockquote>
<p>tell me what I need to know, not what I want to know.</p>
</blockquote>
<p>As secretary of state, he has appointed <a href="https://theconversation.com/from-america-first-to-america-together-who-is-antony-blinken-bidens-pick-for-secretary-of-state-150739">Antony Blinken</a>. A francophone internationalist, Blinken served as former President Barack Obama’s deputy national security adviser and deputy secretary of state. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/from-america-first-to-america-together-who-is-antony-blinken-bidens-pick-for-secretary-of-state-150739">From 'America first' to 'America together': who is Antony Blinken, Biden's pick for secretary of state?</a>
</strong>
</em>
</p>
<hr>
<p>He once made a charming <a href="https://www.youtube.com/watch?v=MYnViieUh7w">appearance on Sesame Street</a>, telling Grover about the United Nations and refugees. He commented </p>
<blockquote>
<p>we all have something to learn and gain from one another even when it doesn’t seem at first like we have much in common. </p>
</blockquote>
<p>The message is a long way from “America first” and the disdain for the rest of the world shown by the Trump administration.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/MYnViieUh7w?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<h2>Advocates of free trade and climate change action</h2>
<p>As treasury secretary, Biden has appointed <a href="https://theconversation.com/vital-signs-janet-yellen-the-very-model-of-a-modern-madam-secretary-150836">Janet Yellen</a>. She was chair of the Federal Reserve from 2014–18 and currently heads the American Economic Association. Nobel laureate Joseph Stiglitz <a href="https://www.wbur.org/hereandnow/2013/10/10/joseph-stiglitz-yellen">recalled her</a> as one of his brightest students. </p>
<p>It is quite an achievement to be the most famous economist in a family that includes a Nobel Prize winner (her husband <a href="https://www.nobelprize.org/prizes/economic-sciences/2001/akerlof/facts/">George Akerlof</a>).</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371650/original/file-20201127-15-1m922j2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Janet Yellen is a strong supporter of open trade.</span>
<span class="attribution"><span class="source">Craig Ruttle/AP</span></span>
</figcaption>
</figure>
<p>An advocate of free trade and expert in labour markets, she understands the damage that <a href="https://theconversation.com/slow-minded-and-bewildered-donald-trump-builds-barriers-to-peace-and-prosperity-128840">Trump’s trade wars</a>, especially with China, have done to working Americans. </p>
<p>Being chair of the Federal Reserve also gave Yellen an important role in international organisations, such as the Bank for International Settlements. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-janet-yellen-the-very-model-of-a-modern-madam-secretary-150836">Vital Signs: Janet Yellen, the very model of a modern Madam Secretary</a>
</strong>
</em>
</p>
<hr>
<p><a href="https://www.theguardian.com/us-news/2020/nov/23/john-kerry-biden-climate-envoy-appointment">John Kerry</a> has been appointed to the new post of climate envoy. He is globally respected as a former secretary of state, and ran unsuccessfully for <a href="https://www.theage.com.au/national/kerry-would-win-by-a-landslide-if-the-world-voted-20041015-gdyt3f.html">president himself</a> in 2004. </p>
<p>His <a href="https://www.ft.com/content/31d93942-6481-4e64-ba85-a6871a142862">appointment</a> signals that the Biden administration recognises the importance of recommitting the US to climate action. Most significantly, Kerry was <a href="https://www.motherjones.com/environment/2020/11/john-kerrys-appointment-as-climate-envoy-shows-the-world-were-back-in-the-game/">highly influential</a> in the final week of negotiations of the Paris Agreement in 2015 and <a href="https://www.bbc.com/news/av/world-us-canada-36116084">signed it</a> for the US the following year with his granddaughter on his lap.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=432&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=432&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=432&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=543&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=543&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371651/original/file-20201127-13-156bzhu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=543&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Kerry was personally involved in pushing the Paris Climate Agreement over the line.</span>
<span class="attribution"><span class="source">Mark Lennihan/AP</span></span>
</figcaption>
</figure>
<p>And following four years of Trump’s anti-immigration policies, Biden has selected a Cuban-born immigrant, <a href="https://edition.cnn.com/2020/11/23/politics/biden-picks-mayorkas-dhs-secretary/index.html">Alejandro Mayorkas</a>, to lead the Department of Homeland Security. After his nomination, Mayorkas <a href="https://twitter.com/cbsnews/status/1331304499621883908">spoke of his desire</a> </p>
<blockquote>
<p>to advance our proud history as a country of welcome.</p>
</blockquote>
<h2>Potential roadblocks in the Senate</h2>
<p>Biden has assembled a team with an international outlook that will re-commit the US to supporting international organisations, such as the World Health Organisation, and treaties like the Paris Agreement. He will seek to <a href="https://www.ft.com/content/c4e1c0e3-ba5b-46f8-87c7-9a56ca7a0a1a">reform</a> rather than just impede the World Trade Organisation.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-a-biden-presidency-means-for-world-trade-and-allies-like-australia-149735">What a Biden presidency means for world trade and allies like Australia</a>
</strong>
</em>
</p>
<hr>
<p>But there’s one significant hurdle still looming. If the Democrats can’t gain control of the Senate by winning the two run-off elections in Georgia in early January, the Republican-led chamber will likely aim to block Biden’s aims of resuming a constructive global role. </p>
<p>For example, Biden will be able to issue an executive order to rejoin the Paris Agreement on his first day as president. But <a href="https://joebiden.com/climate-plan/#">major reforms to cut greenhouse gas emissions</a> or his proposed <a href="https://joebiden.com/clean-energy/">$2 trillion clean energy plan</a> would face <a href="https://theconversation.com/biden-says-the-us-will-rejoin-the-paris-climate-agreement-in-77-days-then-australia-will-really-feel-the-heat-149533">opposition in a Republican-controlled Senate</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371655/original/file-20201127-13-1f2nca1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Senate majority leader Mitch McConnell once described Biden as a ‘trusted partner’, but it remains to be seen how well the Republicans will work with the new administration.</span>
<span class="attribution"><span class="source">Susan Walsh/AP</span></span>
</figcaption>
</figure>
<p>Optimists have compared Biden to former President Lyndon Johnson (also known as LBJ), who may be able to use his decades of legislative experience to achieve more change than was possible for John F. Kennedy or Obama. </p>
<p>Ron Klain, recently announced as Biden’s chief of staff, <a href="https://books.google.com.au/books?id=8FAEEAAAQBAJ&pg=PA146&lpg=PA146&dq=LBJ+might+not+have+been+the+wokest,+coolest,+hippest+Democrat,+but+he%E2%80%99s+the+person+who+got+the+most+actual+progressive+social+justice+legislation+done+since+FDR+%E2%80%A6+he+knew+how+to+make+the+Senate+work.&source=bl&ots=SogONWif0d&sig=ACfU3U0FbvQhV_exeUcHrc1EREJDXvNGSw&hl=en&sa=X&ved=2ahUKEwiusY_ntqHtAhVcyDgGHTcrAFwQ6AEwAHoECAEQAg#v=onepage&q=LBJ%20might%20not%20have%20been%20the%20wokest%2C%20coolest%2C%20hippest%20Democrat%2C%20but%20he%E2%80%99s%20the%20person%20who%20got%20the%20most%20actual%20progressive%20social%20justice%20legislation%20done%20since%20FDR%20%E2%80%A6%20he%20knew%20how%20to%20make%20the%20Senate%20work.&f=false">once put it well</a>: </p>
<blockquote>
<p>LBJ might not have been the wokest, coolest, hippest Democrat, but he’s the person who got the most actual progressive social justice legislation done since FDR […] he knew how to make the Senate work. </p>
</blockquote>
<p>The rest of the world will hope Klain is right and that the Senate does not block the program of this promising new cabinet.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/winning-the-presidency-wont-be-enough-biden-needs-the-senate-too-145034">Winning the presidency won't be enough: Biden needs the Senate too</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/150935/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President-elect Joe Biden’s cabinet picks show a preference for ability and a desire to reengage with the world.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1508362020-11-26T19:02:03Z2020-11-26T19:02:03ZVital Signs: Janet Yellen, the very model of a modern Madam Secretary<p>It is <a href="https://www.nytimes.com/2020/11/23/business/economy/janet-yellen-treasury-secretary.html?action=click&module=Spotlight&pgtype=Homepage">widely tipped</a> that US president-elect Joe Biden will nominate Janet Yellen as Treasury Secretary – one of the most important posts in any administration. </p>
<p>She will make for a terrific Treasury Secretary, bringing with her a wealth of experience and a lot of IQ points. Her appointment also signals what kind of president Biden is likely to be.</p>
<p>Yellen (born August 13, 1946) comes with impeccable credentials. She received her PhD in economics from Yale under Nobel-prize-winning <a href="https://www.nobelprize.org/prizes/economic-sciences/1981/tobin/biographical/">economist James Tobin</a>. She was on the faculty at Harvard and for a long time at the University of California, Berkeley. She was chair of the Council of Economic Advisers for President Bill Clinton and went on to be president of the San Francisco Federal Reserve Bank. </p>
<p>President Barack Obama nominated her in 2010 to be vice-chair of the US Federal Reserve. In 2013 she succeeded Ben Bernanke to become the Fed’s 15th chair.</p>
<p>With apologies to Gilbert and Sullivan, she is the very model of a modern policy maker.</p>
<h2>A centrist and experienced administrator</h2>
<p>Yellen is in many ways a traditional centre-left economist. Her academic work focused mainly on imperfections in labour markets and how unemployment can arise.</p>
<p>One of her <a href="https://academic.oup.com/qje/article-abstract/105/2/255/1864771">best-known papers</a> concerns how workers will put in less effort if they think they are being paid below what they consider to be a “fair” wage.</p>
<p>As chair of the Federal Reserve, given the tough position the US economy was in, Yellen used monetary policy in a conventional and aggressive way – much like her more conservative successor Jerome Powell has done. </p>
<p>But she also championed tougher financial regulation and emphasised that economic inequality was not merely an intrinsic concern but could be a drag on economic growth. </p>
<p>Though Yellen is in every way an excellent choice to head the US Department of the Treasury, Biden had other options. </p>
<p>He was under pressure to nominate someone much further to the left. Senator Elizabeth Warren, one of Biden’s rivals for the 2020 Democratic Party presidential primaries, reportedly <a href="https://www.npr.org/2020/11/10/933548681/who-are-the-candidates-to-become-bidens-treasury-secretary">wanted the job herself</a> – although to her credit she has praised Yellen as “<a href="https://www.bostonglobe.com/2020/11/23/nation/an-outstanding-choice-elizabeth-warren-praises-choice-janet-yellen-treasury-secretary/">an outstanding choice</a>” in recent days.</p>
<p>Yellen may believe in tougher financial regulation, but Warren would have been more than that; she has called the business of Wall Street “<a href="https://medium.com/@teamwarren/end-wall-streets-stranglehold-on-our-economy-70cf038bac76">legalised looting</a>”, indicated her desire to destroy the entire private equity industry, and to impose <a href="https://elizabethwarren.com/plans/ultra-millionaire-tax">a wealth tax of 6% a year</a> – enough to destroy capital accumulation, if not capitalism itself.</p>
<p>All of this signals that Biden, in eschewing the more radical Warren, is (a) not crazy, and (b) planning to run a centrist administration.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-talk-of-a-us-wealth-tax-is-about-symbolism-as-much-as-it-is-about-economics-125803">Vital Signs: talk of a US wealth tax is about symbolism as much as it is about economics</a>
</strong>
</em>
</p>
<hr>
<h2>The importance of the Treasury Secretary</h2>
<p>It is hard for Australians to understand just how important the role of Treasury Secretary is in the US government. Yes, the role of Australia’s federal treasurer is regarded as second only to the Prime Minister, but that is in the context of cabinet government with an expenditure review committee.</p>
<p>By contrast, the US Treasury Secretary (with the support of the US president) wields almost unfettered economic authority.</p>
<p>That might be a blessing and a curse for Yellen, for she will take office with the US in the worst economic shape since the Great Depression.</p>
<p>From day one the whole Biden administration, Yellen included, will face huge challenges. </p>
<p>First, it must get the COVID-19 pandemic – now running rampant – under control. As any amount of international evidence has shown, one can’t have a functioning economy during a pandemic. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/data-from-45-countries-show-containing-covid-vs-saving-the-economy-is-a-false-dichotomy-150533">Data from 45 countries show containing COVID vs saving the economy is a false dichotomy</a>
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</em>
</p>
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<p>Pandemic control itself will not be Yellen’s job. But what will be immediately important, and within her purview, is getting Congress to pass a stimulus package to boost the US economy while the virus is brought under control through various measures – perhaps even including the rollout of a vaccine.</p>
<p>That will be no easy task. Republicans in “red” states that have set aside so-called “rainy-day funds” feel loathe to fund what they basically see as a bailout to Democratic “blue” states who haven’t done the same. Senator Mitt Romney made exactly this point <a href="https://edition.cnn.com/audio/podcasts/axe-files">when talking to CNN podcast host</a> and former Obama advisor David Axelrod last week.</p>
<p>Beyond the immediate coronavirus response, Yellen will also face big challenges – perhaps the most vexing ones of all.</p>
<h2>Economic problems beyond the pandemic</h2>
<p>Prior to COVID-19, the US economy was in a low-growth, low-inflation funk. Something former treasury secretary Larry Summers has famously referred to as “<a href="https://theconversation.com/secular-stagnation-its-time-to-admit-that-larry-summers-was-right-about-this-global-economic-growth-trap-112977">secular stagnation</a>”.</p>
<p>This is where Janet Yellen, labour economist, may be just the person to be in charge of the treasury.</p>
<p>What economists and policy makers alike still don’t understand is why the speed limit of the US (and other advanced) economies seems to have dropped. Why is it unemployment needs to be close to 3% to get wage growth moving in the US? Why is inflation persistently low even in the face of very loose monetary policy?</p>
<p>This is also where Janet Yellen, former Fed chair, may also be the perfect person to be in charge. Thinking hard about how very low interest rates and fiscal policy interact in a practical way is a deeply important issue. </p>
<p>Plenty of smart people are working on that problem, but there is something unique about a former Fed chair and current Treasury Secretary marshalling an effort to provide a better understanding of this interaction.</p>
<p>When Biden officially announces (and the Senate confirms) Yellen’s appointment, we can look forward to one of the great economic policy makers of our time helping to deal with some of the most pressing challenges of our time.</p><img src="https://counter.theconversation.com/content/150836/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Janet Yellen is the perfect choice to tackle the worst economic crisis in a century, and the problems that lie beyond.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1507992020-11-25T13:37:58Z2020-11-25T13:37:58ZJanet Yellen and Kamala Harris keep shattering glass ceilings – but global elite boys club remains<figure><img src="https://images.theconversation.com/files/371167/original/file-20201124-13-6gl514.jpg?ixlib=rb-1.1.0&rect=221%2C66%2C3458%2C2362&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Yellen with a few of the boys. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FederalReserve/e5d8b937b361452498784480d9fab060/photo?Query=yellen%20AND%20fed&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=566&currentItemNo=5">AP Photo/Annie Rice</a></span></figcaption></figure><p><a href="https://www.nytimes.com/2020/11/23/business/economy/janet-yellen-treasury-secretary.html">Janet Yellen may soon become</a> the first woman to lead the Treasury Department, about six years after shattering another glass ceiling at the top of the Federal Reserve. </p>
<p>She’s not alone in breaking down barriers in President-elect Joe Biden’s proposed new Cabinet. <a href="https://www.nbcnews.com/politics/2020-election/michele-flournoy-would-be-first-woman-run-pentagon-may-bring-n1248686">Michele Flournoy is the favorite</a> to lead the Pentagon, while <a href="https://www.nytimes.com/2020/11/24/us/politics/biden-nominees-national-security.html">Biden named Avril Haines</a> to be his director of national intelligence – if confirmed, they would be the first women in either of those positions. And that’s not to mention Kamala Harris, who on Jan. 20 <a href="https://www.nytimes.com/2020/11/07/us/politics/kamala-harris.html">will become the first woman</a> vice president in U.S. history. </p>
<p>There’s often an expectation that <a href="https://www.weforum.org/agenda/2020/03/more-women-in-leadership-shouldnt-matter-but-it-really-does/">busting these barriers</a> – as women <a href="https://www.insider.com/trailblazing-women-who-broke-barriers-for-others">have been doing for many decades</a> – will eventually <a href="https://www.visier.com/clarity/stories-from-women-in-banking-and-energy-leadership">lead to the kinds of systemic changes</a> that will finally yield parity between men and women in leadership roles in government, the corporate world and beyond. </p>
<p>To understand these dynamics better, <a href="https://doi.org/10.1111/glob.12309">we analyzed the connections among the elites</a> who govern many of the world’s most powerful companies and organizations. We wanted to see how many women and people of color had found their way to the center of these networks, which is a signal of how influential they are. </p>
<p>While Yellen and Harris represent progress, our results show it’s still largely a boys club. </p>
<h2>Two steps forward, one step back?</h2>
<p>Around the world, <a href="https://www.weforum.org/reports/gender-gap-2020-report-100-years-pay-equality">women are increasingly making their way into</a> positions of power in <a href="https://www.chronicle.com/article/can-economics-fix-its-gender-imbalance-problem-itll-take-more-than-research-women-say">disciplines like economics</a> <a href="https://hbr.org/2016/10/why-women-arent-making-it-to-the-top-of-financial-services-firms">and finance</a> <a href="https://news.berkeley.edu/story_jump/fighting-misogyny-in-economics-alice-wu-take-a-bow">that are</a> <a href="https://www.nytimes.com/2017/08/18/upshot/evidence-of-a-toxic-environment-for-women-in-economics.html">notoriously sexist</a>. </p>
<p>Yet despite notable achievements, such as at the <a href="https://www.bbc.com/news/business-49833220">International Monetary Fund</a>, where both the present and previous heads have been women, the worlds of <a href="https://hbr.org/2018/12/what-will-it-take-to-make-finance-more-gender-balanced">finance</a> and <a href="https://theconversation.com/why-are-there-so-few-women-ceos-103212">business</a> remain highly male-dominated. </p>
<p>Among big global corporations, for example, women are rarely in top leadership positions. For example, only 37 of the companies listed among the Fortune 500 are led by women – and <a href="https://fortune.com/2020/05/18/women-ceos-fortune-500-2020/">yet this is a record high</a>. In the U.S., <a href="https://www.pewresearch.org/fact-tank/2018/04/30/women-scarce-at-top-of-u-s-business-and-in-the-jobs-that-lead-there">only 5% of CEOs</a> in the S&P 1500 are women. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p>
<figure class="align-center ">
<img alt="Vice President-elect Kamala Harris speaks in Wilmington, Del,, on Nov. 24." src="https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371357/original/file-20201125-19-afq3z0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Vice President-elect Kamala Harris will be the first woman in the job when she takes office in January.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/546ff3f9279647098a9740fc83488631/photo?Query=kamala%20AND%20harris&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=4806&currentItemNo=3">AP Photo/Carolyn Kaster</a></span>
</figcaption>
</figure>
<h2>The inner circle</h2>
<p>Why are so few women breaking through?</p>
<p>We thought the answer might lie in looking at global elites. These leaders have power not only because they run organizations but because they often have many connections to other elites. </p>
<p>In a <a href="https://doi.org/10.1111/glob.12309">paper published</a> in November in the peer-reviewed journal Global Networks, we examined the racial and gender diversity among the elite leaders who govern about 100 of the most powerful organizations and companies in the world based on global rankings and size. Our list includes some of the <a href="https://www.forbes.com/global2000/#566b4dab335d">world’s largest companies</a>, such as Walmart and JP Morgan, several influential nongovernmental organizations, such as Doctors Without Borders, Oxfam and Amnesty International, and international organizations of all kinds, such as the World Trade Organization and the World Economic Forum.</p>
<p>For each organization, we focused on the individuals who sat on their governing boards. These are the folks who make an organization’s most important decisions and determine who is ultimately in charge. We assembled a list of about 1,600 people who were on these boards in 2018. We then analyzed their ties to one another in terms of belonging to the same boards across organizations. </p>
<p>In all, we found about 9,000 ties that connected these leaders, creating a massively complex global network. By adding up these ties, we were able to reveal a snapshot of how leaders relate to one another and – more importantly – which leaders were at the periphery of the network and which were at its center. </p>
<p>We wanted to determine whether many women or people of color have made it to the center or core of this global network of elites or whether they <a href="https://rowman.com/ISBN/9781538103364/Diversity-in-the-Power-Elite-Ironies-and-Unfulfilled-Promises-Third-Edition">mostly remained at the periphery</a>. <a href="https://doi.org/10.1093/socpro/spy014">Studies of network power</a> have found that it’s not enough to be a part of this network to have influence; one must be <a href="https://doi.org/10.1086/691603">highly connected</a> within it as well. </p>
<p>We found that women made up about 25% of leaders in the network – but only 6% were women of color. Men of color made up about 21%. The other leaders were all white men, who made up over half of those in the network.</p>
<p>What was most striking to us, however, was how few women and people of color penetrated the highly interconnected inner circle. Just 15% were women and 10% were men of color. Very few were women of color. Yet the figure for white men in the inner circle jumps up to 75%. </p>
<h2>Making connections</h2>
<p>This, of course, is just a snapshot. </p>
<p>We don’t know how it’s changed since or what it was 10 or 20 years ago. We are currently trying to chart how these dynamics evolve over time.</p>
<p>One thing we do know is that men tend to dominate the inner circle of these networks, and that’s likely allowing them to amass even more power and influence.</p>
<p>It’s not enough for women and people of color to make it to leadership positions; they also need to be able to tap into the center of power networks to ensure the progress represented by Yellen, Harris and Biden’s other Cabinet picks continues.</p><img src="https://counter.theconversation.com/content/150799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin L. Young received funding from the Institute of Diversity Sciences at the University of Massachusetts Amherst in relation to this research.</span></em></p><p class="fine-print"><em><span>Tuugi Chuluun is affiliated with Chartered Financial Analysts Institute (member) and CFA Society Baltimore (board member).</span></em></p>An analysis of 100 of the most powerful organizations in the world shows women are still struggling to penetrate the deepest corridors of power.Kevin L. Young, Associate Professor of Economics, UMass AmherstTuugi Chuluun, Associate Professor of Finance, Loyola University MarylandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/870992017-11-09T19:20:21Z2017-11-09T19:20:21ZVital Signs: business conditions are peachy, so why aren’t businesses investing?<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: interest rates remained on hold as housing finance fell to a new low, conditions remain good for business, but they’re still not investing, and the US economy will likely miss Janet Yellen.</em></p>
<hr>
<p>On Melbourne Cup day, the RBA kept interest rates on hold at 1.5%, yet again. And why wouldn’t it?</p>
<p>There has been some progress in curtailing the runaway housing market, inflation is still low, and upcoming changes to the way inflation is measured seem set to push it lower than it would otherwise have been.</p>
<p>The Australian Bureau of Statistics (ABS) will now put more weight on rent and utilities and less on food and non-alcoholic beverages, beginning in December. Macquarie Securities analyst <a href="http://www.smh.com.au/business/the-economy/abs-tweak-has-big-impact-on-interest-rates-inflation-20171106-gzfzzc?deviceType=text">Justin Fabo suggested</a> this would have lowered the September quarter CPI by 25 basis points if the new method had been used.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-why-some-economists-think-the-rba-should-drop-its-inflation-target-64265">Explainer: why some economists think the RBA should drop its inflation target</a>
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<p>Moreover, with Amazon set to enter Australia – and the Australian Competition and Consumer Commission <a href="http://www.huffingtonpost.com.au/2017/11/04/amazon-will-be-able-to-legally-set-super-low-prices-and-undercut-local-competition_a_23266601/">blessing its ability to charge low prices</a> without running afoul of competition laws – there could be more downward pressure on inflation. Note to ABS: put online shopping properly in the CPI basket!</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0">ABS figures released Thursday</a> showed that housing finance for September fell 3.6% to A$32.5 billion (in seasonally adjusted terms) – the lowest it has been since April. In fact, the year-on-year level is unchanged. </p>
<p>Investor loans were down sharply, 6.2%. This appears to be connected to the Australian Prudential Regulation Authority’s regulatory clamp-down on interest-only loans. If this tightens credit growth relatively slowly, it could help the housing market from getting further out of control. But there’s a lot more evidence needed to feel comfortable that’s what we’re witnessing.</p>
<p>Meanwhile, on the business side, <a href="https://business.nab.com.au/nab-monthly-business-survey-september-2017-26604/">the NAB business conditions index</a> held steady at a robust +14 points.</p>
<p>NAB’s Chief Economist, Alan Oster, said: </p>
<blockquote>
<p>Business conditions at these levels tell us that the business sector in Australia is doing very well. We have certainly seen that reflected to some degree in areas like corporate profits and jobs growth, but other aspects of the economy – such as business investment – have been somewhat disappointing in comparison. In that context, it will be important to keep an eye on the recent softer trend in business confidence.</p>
</blockquote>
<p>And there’s the rub. “Conditions” isn’t the same thing as “confidence”. </p>
<p>Conditions are pretty good for business: low interest rates, low inflation, relative financial stability. But a weak consumer side has for a long time been related to sluggish business investment and a pronounced lack of confidence. As Oster put it:</p>
<blockquote>
<p>Limited pass-through of lofty business conditions to the broader economy could be signalling ongoing risk aversion and a preference to use profits for balance sheet repair. Additionally, our previous concerns around the consumption outlook remain well entrenched, especially following very poor retail sales in August and stubbornly weak retail conditions in the NAB Survey.</p>
</blockquote>
<p>The main news overseas was the much anticipated announced of Jay Powell as chair of the US Federal Reserve. Although Powell is a solid choice – and much better than some of the loopy possibilities that were floated by the Trump White House – it is certainly sad that Janet Yellen not be reappointed.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/trump-picks-safe-choice-to-lead-the-federal-reserve-6-questions-answered-86661">Trump picks 'safe' choice to lead the Federal Reserve: 6 questions answered</a>
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</em>
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<p>Yellen has done an extraordinary job as a steward of the US economy. Among other things, she held her nerve in keeping interest rates low to help the economy recover, despite all kinds of bed-wetting from inflation hawks who were convinced that low rates would lead to an inflation spiral.</p>
<p>Yellen seemed to understand better than anyone that we were living in a new economic era in which inflationary pressures were much more muted than they have been in the past – even with very low measured unemployment, such as 4.1% in the US.</p>
<p>She also advocated a relatively hard line on financial regulation, while signalling openness to reconsidering parts of <a href="https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp">Dodd-Frank</a>. This is the area where Powell needs to be watched. Will he go along with slashing financial regulations and opening up the possibility of another financial crisis?</p>
<p>Let’s hope not – but with Yellen we knew for sure.</p><img src="https://counter.theconversation.com/content/87099/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Business conditions aren’t translating to confidence, despite growing profits and jobs.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/866612017-11-02T19:20:06Z2017-11-02T19:20:06ZTrump picks ‘safe’ choice to lead the Federal Reserve: 6 questions answered<figure><img src="https://images.theconversation.com/files/193096/original/file-20171102-26426-7avuny.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">This man may soon be the world's 'second-most-powerful person.'</span> <span class="attribution"><span class="source">AP Photo/Andrew Harnik</span></span></figcaption></figure><p><em>Editor’s note: Markets <a href="https://www.cnbc.com/2017/11/01/powell-is-the-boring-choice-but-the-best-for-stocks.html">breathed a sigh of relief</a> after President Donald Trump <a href="https://www.nytimes.com/2017/11/02/business/economy/jerome-powell-federal-reserve-trump.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news">named Jerome Powell</a> his pick to be the next chair of the Federal Reserve. If confirmed, Powell – considered <a href="https://www.reuters.com/article/us-usa-trump-fed-powell/feds-powell-rose-to-top-of-trumps-list-as-safe-business-savvy-choice-idUSKBN1D225C">a “safe” choice</a> – would take over from current Chair Janet Yellen in February, becoming one of the world’s most powerful people. So what’s the big deal? Economist Greg Wright explains why who leads the U.S. central bank matters to us all.</em> </p>
<h2>1. What does the Fed do?</h2>
<p>The <a href="https://www.federalreserve.gov">Federal Reserve</a> oversees all banks and financial institutions based in the U.S., including branches of foreign companies, and also sets U.S. monetary policy. </p>
<p>The main way it does the latter is through its target interest rate. This benchmark influences the pace of economic growth, the level of employment and the price of goods, services and assets around the world. As the engine behind the world’s most important economy, the Fed’s influence is hard to overstate.</p>
<p>As a result, the Fed affects the likelihood that you – and millions of others around the world – will keep your job, will be able to afford a new home and will be able to retire when you want. And while most Fed decisions are made by a <a href="https://www.federalreserve.gov/aboutthefed/bios/board/default.htm">seven-member Board of Governors</a>, the chair’s voice is by the far the most important. For this reason the Fed chair is <a href="https://www.huffingtonpost.com/entry/janet-yellen-most-powerful-person_us_5672d3d6e4b0648fe3026341">sometimes referred to</a> as the “second-most-powerful person in the world” – after the U.S. president. </p>
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<img alt="" src="https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193102/original/file-20171102-26426-1jptihi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Donald Trump names Jerome Powell as his nominee to lead the Fed in a Rose Garden ceremony.</span>
<span class="attribution"><span class="source">AP Photo/Alex Brandon</span></span>
</figcaption>
</figure>
<h2>2. How does the chair shape Fed policy?</h2>
<p>The Fed’s mandate – as <a href="https://www.federalreserve.gov/faqs/money_12848.htm">established by Congress</a> – is easily stated but difficult to achieve. It seeks strong economic growth, maximum employment and stable prices. The second two aims are often referred to as the “<a href="https://www.chicagofed.org/research/dual-mandate/dual-mandate">Fed’s dual mandate</a>,” since those are the main ways it seeks to achieve the first one: strong economic growth.</p>
<p>The main lever that the Fed can adjust to achieve these ends is its “target rate,” currently set at 1 percent to 1.25 percent. This short-term interest rate indirectly determines everything from stock prices to exchange rates to the cost of borrowing money for a new car or home. </p>
<p>As a result, the beliefs and background of the Fed chair matter a great deal. </p>
<p>Broadly speaking, experts in monetary policy fall within one of two camps: “hawks” and “doves.” Those considered “hawkish” are concerned more with the dangers of inflation – the pace at which prices change – and asset bubbles – when the price of an asset greatly exceeds its intrinsic worth – so they tend to want to raise interest rates at the first sign of either. In contrast, doves tend to focus on keeping the economy growing and, in particular, ensuring a strong labor market, which makes them more hesitant to raise rates, all else being equal. </p>
<p>Yellen, who has held the post since 2014, is considered a dove. Stanford economist John Taylor, <a href="https://www.nytimes.com/2017/10/24/us/politics/trump-fed-powell-taylor-yellen.html">who was favored</a> to be the new Fed chair by many Trump donors and backers, is considered more hawkish. Powell is somewhere in between.</p>
<p>There are risks associated with each of these approaches. If the Fed raises interest rates too soon, the economy may fall into recession. On the other hand, if interest rates remain too low for too long, prices may rise faster than the Fed can control, which may lead to asset price bubbles. <a href="https://www.forbes.com/sites/peterferrara/2011/05/19/how-the-government-created-a-financial-crisis/#1f44f63821fb">Some commentators</a> believe the housing bubble that precipitated the recent financial crisis was a result of overly dovish monetary policy.</p>
<p>Nevertheless, dovish policies have recently won out in large part because, despite the <a href="https://tradingeconomics.com/united-states/gdp-growth">strong economy</a>, there has been <a href="https://www.bls.gov/cpi/">very little inflation</a>. The jury is out on whether we are in the <a href="https://www.bloomberg.com/news/articles/2017-08-09/if-we-are-racing-to-the-pre-crisis-bubble-here-are-12-charts-to-watch">midst of another asset bubble</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193100/original/file-20171102-26472-1m27yja.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Fed seal is seen on the wall during Powell’s first meeting as a member of the central bank’s governing board.</span>
<span class="attribution"><span class="source">AP Photo/Charles Dharapak</span></span>
</figcaption>
</figure>
<h2>3. Who is Jerome Powell?</h2>
<p>Powell is a Republican and a wealthy former investment banker who <a href="https://www.federalreserve.gov/aboutthefed/bios/board/powell.htm">currently serves on the Fed’s Board of Governors</a>. He was first nominated by President Barack Obama in 2012. Perhaps the most notable feature of his biography is that he lacks a background in economics, expertise that the previous three Fed chairs brought to the table.</p>
<p>Given that Powell has consistently <a href="https://www.marketwatch.com/story/imagining-life-under-a-jerome-powell-fed-2017-10-20">expressed</a> moderate views regarding monetary policy, the choice is seen as a cautious one, signaling that the Trump administration’s primary goal is to keep the global economy on its current path of steady growth and low unemployment. In short, Powell <a href="http://www.denverpost.com/2017/10/31/jay-powell-top-candidae-fed-chair/">is expected</a> to continue Yellen’s relatively dovish policies. </p>
<h2>4. Why did Trump choose him?</h2>
<p>At the same time, the other half of the Fed’s duties should not be forgotten: regulating U.S. financial institutions. </p>
<p>And in this regard, Powell’s nomination comes with a possible bonus for the administration, namely that he <a href="https://www.nytimes.com/2017/10/29/business/federal-reserve-chairman-trump.html">has expressed a desire</a> to roll back some of the regulations imposed on the financial sector following the 2008 crisis. This fits with the administration’s <a href="http://www.weeklystandard.com/donald-trump-king-of-deregulation/article/2010173">larger push for deregulation</a> of many aspects of the economy.</p>
<p>Any rollback <a href="https://www.reuters.com/article/us-fed-powell/feds-powell-says-more-u-s-regulation-not-always-the-answer-idUSKBN1CA1KA">would be a boon</a> to the financial industry, but the fear is that it could also increase the likelihood of a future crisis. So far it is unclear how far Powell would go to relax the regulatory regime and to what extent he would target regulations that <a href="http://www.bbc.com/news/business-20811289">many</a> <a href="https://www.federalreserve.gov/newsevents/speech/tarullo20161202a.htm">commentators</a> deem key to avoiding a future financial meltdown. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193097/original/file-20171102-26478-9ksx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Chair Janet Yellen oversees an open meeting of the Fed. Vice Chair Stanley Fischer is at her right. To her left are Daniel Tarullo, Jerome Powell and Lael Brainard.</span>
<span class="attribution"><span class="source">AP Photo/Cliff Owen</span></span>
</figcaption>
</figure>
<h2>5. Why not keep Yellen?</h2>
<p>For Yellen, it is an unusually abrupt exit, having served only one term – <a href="https://www.bloomberg.com/news/articles/2017-11-02/trump-passes-over-excellent-yellen-after-just-one-term-at-fed">and a successful one</a> at that. In addition, some commentators <a href="https://www.washingtonpost.com/news/wonk/wp/2017/10/31/jerome-powell-trumps-pick-to-lead-fed-would-be-the-richest-chair-since-the-1940s/">have lamented</a> the relatively quick ousting of the first woman to hold the position, particularly in light of her strong performance.</p>
<p>Trump is breaking with precedent by not reappointing Yellen to a second four-year term. The <a href="https://www.nytimes.com/2017/11/02/business/economy/jerome-powell-federal-reserve-trump.html">previous three chairs were reappointed</a> without controversy – and by a president of the opposing political party no less, largely to signal support for the apolitical nature of the Fed.</p>
<h2>6. So why choose a new Fed chair at all?</h2>
<p>It’s a risky time to change leadership. Most critically, the Fed is beginning the process of ending a decade of highly accommodative monetary policy during which interest rates were at <a href="https://fred.stlouisfed.org/series/FEDFUNDS">unprecedented lows</a> and the bank was pumping trillions of dollars into the financial system. The Fed is gradually increasing interest rates and slowly reducing the size of its balance sheet, which has <a href="https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm">swelled to US$4.5 trillion</a> from under $1 trillion before the financial crisis. </p>
<p>The transition has the potential to be highly disruptive if mismanaged. Whereas the initial purchase of $3.7 trillion in assets was an unusual policy enacted during fairly desperate times, the process of unwinding it is unprecedented. </p>
<p>Simply put, <a href="http://www.businessinsider.com/unknown-effects-of-fed-unwinding-balance-sheet-2017-7">no one is sure</a> if it can be done without spooking markets or causing a recession. Who’s in charge at the Fed could be key to successfully navigating this process, which will take many years.</p><img src="https://counter.theconversation.com/content/86661/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Greg Wright does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The chair of the Federal Reserve is often considered the world’s ‘second-most-powerful person.’ So who is Jerome Powell and why does it matter that he may soon head the Fed?Greg Wright, Assistant Professor of Economics, University of California, MercedLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/866182017-11-02T19:04:11Z2017-11-02T19:04:11ZVital Signs: the US economy is outpacing Australia’s and we should all ask why<figure><img src="https://images.theconversation.com/files/192961/original/file-20171102-26483-ue6zk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: housing credit is still propping up lending in Australia, while the US economy goes from strength to strength.</em></p>
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<p>Data this week pointed to a continued shakiness in the Australian economy, while the robust US recovery continued.</p>
<p>In Australia, <a href="http://rba.gov.au/statistics/frequency/fin-agg/2017/fin-agg-0917.html">private-sector lending</a> grew at just 0.3%, compared to 0.5% in August. Perhaps more worryingly, business lending dropped 0.1%. It was, again, housing credit growth that propped up the overall figures, growing 0.5% for the month.</p>
<p>Worse still, new home sales fell 6.1% in September, compared to August, according to the Housing Industry Association. So Australians aren’t borrowing much, except to finance the swapping around of each other’s houses at higher and higher prices. Note to picky readers: yes, prices fell a tiny bit in Sydney last month (0.1%), but are still up 10.5% year-on-year.</p>
<p>The US labour market bounced back from the hurricane season, adding 235,000 private sector jobs, according to data from payroll provider ADP. This wasn’t merely a bounce back — it exceeded expectations of a 200,000 gain. This was the biggest gain since March and further evidence of the strong US recovery.</p>
<p>It was not surprising, then, that Conference Board figures showed <a href="https://www.bloomberg.com/news/articles/2017-10-31/u-s-consumer-confidence-index-rises-to-highest-level-since-2000">strong consumer confidence</a>. What was striking, however, was just how strong those figures were. The confidence index rose to 5.3 points to 125.9 – the highest since December 2000. The present conditions measure was also at its highest level since 2001.</p>
<p>The US Federal Reserve kept interest rates on hold at a band of 1.0-1.25% at this week’s meeting, but signalled a fairly high likelihood of a rate rise when they meet in December. As the <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20171101a.htm">statement</a> put it:</p>
<blockquote>
<p>The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.</p>
</blockquote>
<p>Perhaps the only real wrinkle is that inflation remains stubbornly low, despite unemployment being at 4.2%. Some measures of inflation expectations are rising, so the best bet is for a 25 basis point rise in December.</p>
<p>The Fed’s statement made pretty explicit how they think about balance these factors, stating: </p>
<blockquote>
<p>the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.</p>
</blockquote>
<p>Of course, current Fed Chair Janet Yellen’s term concludes in February next year, and it is being widely reported that President Trump will not reappoint her. Rather he seems set (to the extent that is possible with him) to <a href="https://www.bloomberg.com/news/articles/2017-11-01/powell-to-be-trump-s-nominee-for-fed-chair-replacing-yellen-wsj">appoint Jay Powell as Chair.</a></p>
<p>I will have more to say about that in future columns, but the main thing to note here is that Powell is extremely likely to continue with the path of monetary policy that Yellen has laid out.</p>
<p>So why is it that the US – which suffered a major downturn – seems to have a stronger economy than Australia – which did not even go into recession in 2008-09?</p>
<p>One view is that the US went through a process of Schumpetarian “creative desctruction”. Homeowners who couldn’t afford their properties got foreclosed on, investment banks that weren’t viable went bust, and the rest of the financial system was recapitalised.</p>
<p>Australian banks, by contrast have made some progress in getting their funding structure to be less short-term and dependent on US capital markets – but only so much. And it seems quite possible that they continue to make questionable loans – particularly interest-only loans – as I wrote about <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">here</a>, and spoke about <a href="https://thejollyswagmen.com">here</a>. </p>
<p>A second view is that the US economy is better able to adapt to the changing nature of the modern economy. It has much more flexible labour markets – although much harsher and less rewarding for average workers.</p>
<p>Perhaps it is neither of these, but presumably both the Reserve Bank and Treasury are trying to understand what looks like a striking different between the US and Australian experiences.</p><img src="https://counter.theconversation.com/content/86618/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Why is it that the US – which suffered a major downturn – seems to have a stronger economy than Australia , which did not even go into recession in 2008-09?Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/832312017-08-31T20:28:15Z2017-08-31T20:28:15ZVital Signs: living in the past won’t distract from our current economic woes<figure><img src="https://images.theconversation.com/files/184163/original/file-20170831-22590-vgxil0.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian Treasurer Scott Morrison likes to remind us of the economic achievements of the past.</span> <span class="attribution"><span class="source">Paul Miller/AAP</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the US economy looks to be improving, however Australia is on shaky ground with low interest rates, high household debt and the Aussie dollar on the rise again.</em></p>
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<p>Other than the data of the week, the most interesting economic news was the central banking conference in Jackson Hole.</p>
<p>In <a href="https://theconversation.com/vital-signs-dont-expect-much-from-the-central-bankers-at-jackson-hole-82892">this column last week</a> I speculated that we wouldn’t hear anything too shocking from Fed Chair Janet Yellen or ECB President Mario Draghi. And we didn’t. But Yellen’s speech did make headlines for two reasons.</p>
<p>First, she offered a full-throated defence of the post-financial crisis regulatory reforms adopted in the United States (so-called “Dodd-Frank”, for the Bill’s co-sponsors Chris Dodd and Barney Frank).</p>
<p>“The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth. But many reforms have been implemented only fairly recently, markets continue to adjust, and research remains limited,” said Yellen.</p>
<p>This, of course, is in stark contrast to President Trump’s promises to slash regulation of all kinds. Which bring us to the second reason Yellen’s speech made headlines. It doesn’t look like she is going to be reappointed as Fed Chair when her term expires in February. I will have more to say about that at a later date, and it’s tricky to make predictions about what President Trump is going to do on any matter. But Yellen’s speech did seem to have a strong swansong element.</p>
<p>Meanwhile, the Commerce Department on Wednesday revised second-quarter US GDP growth upward, from an annualised rate of 2.6% to 3.0%. This adds weight to the view that the US economy is recovering to some kind of new normal, and that the Fed’s interest rate tightening cycle will likely continue, if somewhat gingerly.</p>
<p>It was no surprise, then, to see US consumer confidence rise strongly in August. The confidence index rose to 122.9 (compared to estimates of 120.7) from 120 in July. The so-called “present conditions” measure increased to 151.2, up from 145.4, which is the highest level since July 2001. This was prior to Hurricane Harvey devastating Houston, so next month might not be so stellar. Nonetheless, with unemployment and inflation low, interest rates still accommodating and growth returning, there are good reasons for consumers to be a little more upbeat.</p>
<p>Speaking of jobs, the <a href="https://www.adpemploymentreport.com">US ADP Research Institute</a> reported that private payrolls rose by 237,000 in August, compared to estimates of 185,000. This represented the biggest gain in five months, and was even higher than the gain of 201,000 jobs in July.</p>
<h2>Australia - it could have been worse</h2>
<p>Back in Australia the news may not be so good, with June-quarter GDP figures to be released next Wednesday. Morgan Stanley is forecasting economic growth has slowed to 0.2% in the June quarter. That would put annual growth at 1%, compared to an already shaky 1.7% in the March quarter.</p>
<p>Treasurer Scott Morrison <a href="http://sjm.ministers.treasury.gov.au/speech/022-2017/">gave a speech</a> in Sydney, pointing to the economic achievements of the past. Anything, basically, to distract attention from the perilous state of the Australian economy.</p>
<p>One of the sectors that has helped bolster the economy – construction – was a mixed bag in July. The ABS announced that total approvals fell by 1.7% to 18,299 (seasonally adjusted). That put the year-on-year decline at 13.9%. Markets expected a drop of 5%, or 16.6% in year-on-year terms.</p>
<p>That’s where we are now with the Australian economy – repeatedly saying “it could have been worse”.</p>
<p>Private capital expenditures released Thursday were 0.8% quarter-on-quarter, compared to 0.9% previously. Another disappointing - though not shocking - result, revealing only modest investment in plants and equipment.</p>
<p>And why would one invest? A suspect economy, expensive energy, a policy vacuum masquerading as climate policy, and question marks about the eligibility of a swath of parliamentarians to hold office don’t exactly inspire confidence.</p>
<p>In sum: the US economy looks to be improving and the Fed may well have navigated a remarkable passage through the wreckage of the financial crisis under Ben Bernanke and Janet Yellen.</p>
<p>The Australian economy looks shaky. We have historically low interest rates, record-breaking and disturbingly high household debt that is backed by housing prices that may or may not be part of a bubble, and the RBA is using one instrument to aim at five or six goals (the Aussie dollar, growth, employment, inflation, house prices and household debt).</p>
<p>Oh, and the assumptions in the federal budget are much rosier than what is playing out. So we have a continued structural deficit problem.</p><img src="https://counter.theconversation.com/content/83231/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Repeatedly boasting about the past won’t distract from the fact Australia’s economy is looking shaky.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/828922017-08-24T19:18:40Z2017-08-24T19:18:40ZVital Signs: don’t expect much from the central bankers at Jackson Hole<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: economic data is thin on the ground as central bankers converge on Jackson Hole for their annual meet and greet.</em></p>
<hr>
<p>This Friday, the world’s central bankers and some high profile economics professors will gather in Jackson Hole, Wyoming, for the annual <a href="https://www.kansascityfed.org/publications/research/escp/jackson-hole">Jackson Hole Economic Policy Symposium.</a></p>
<p>The Symposium, which is hosted by the Kansas City Federal Reserve, began in 1978. It does allow for discussions, information exchange, and time to reflect on the key issues bearing on monetary policy. But it’s not like the US Fed Chair Janet Yellen can’t talk to the European Central Bank (ECB) president whenever she wants – and vice versa.</p>
<p>More importantly, it provides a platform for Yellen and ECB President Mario Draghi to send very public messages about the future path of monetary policy in their respective jurisdictions.</p>
<p>The theme this year is “Fostering a Dynamic Global Economy”. That sounds like a good thing to have – better than an “undynamic one” – but don’t expect a lot of headline-grabbing comments from Yellen or Draghi.</p>
<p>All the data, and all the recent public statements by Yellen and Draghi, point to things basically going as planned. Cross your fingers. Hold your breath. Pray. Whatever works for you.</p>
<p>Draghi is a very smart guy, but he made a complete unforced error in a speech in June. At a banking conference in Portugal he offered: “All signs now point to a strengthening and broadening recovery in the euro area.”</p>
<p>Markets sure paid attention to those remarks. Bond yields rose, as did the Euro, as investors figured Draghi was going to start unwinding his quantitative easing policy. That led to a cast of ECB members having to tell markets that QE was here to stay for now.</p>
<p>Draghi seems to have learned his lesson. On Wednesday in Lindau, Germany he said: “While forward guidance (a tool used by central banks to influence, with their own forecasts, market expectations) is a useful instrument, recent research has highlighted that its effectiveness can be improved if combined with other non-standard monetary policies.”</p>
<p>Translation: no end to QE for now.</p>
<p>We can expect him to say something equivalently uninformative in Jackson Hole (which is actually a compliment to a central banker).</p>
<p>In the US, the Fed has been slowly, deliberately, and carefully tightening monetary policy in response to low unemployment and improved GDP growth. According to the Bureau of Labor Statistics (BLS), <a href="https://www.bls.gov/news.release/pdf/empsit.pdf">unemployment now stands at 4.3% nationally</a>. Wage growth is still on the low side with average hourly earnings (for private, nonfarm payrolls) at US$26.36, up by 2.5% year-on-year to July. But compare that to Australia’s 1.8% wages growth for private-sector workers.</p>
<p>The main issue for the Fed is that inflation remains subdued. Two weeks ago the US Labor Department released figures showing the CPI was up 0.1% in July, after being unchanged in June. Year-on-year the CPI stood at 1.7%, still below the 2% Fed target.</p>
<p>This is Big Issue One for the Fed. Why is inflation so stubbornly low? Is it really because stuff is cheap on Amazon? It’s fair to say that the Fed’s (and others’) macroeconomic models are having a hard time explaining this fact.</p>
<p>But don’t expect Yellen to wade into the inflation-puzzle waters this week. That’s the sort of thing best done in the post-summer period – the US academic new year. My guess is that Yellen will start addressing that topic publicly some time before Thanksgiving, if she decides to do so at all.</p>
<p>There is, however, always the possibility for some fireworks at Jackson Hole. Not from Yellen or Draghi, but one of the academic speakers.</p>
<h2>Rocking the boat</h2>
<p>At Jackson Hole in 2005 University of Chicago Booth School of Business professor <a href="https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp082705">Raghuram Rajan gave a speech</a> that was not popular with then-Fed-Chair Alan Greenspan, but turned out to be prescient.</p>
<p>The title of the paper he based it on was <a href="http://www.nber.org/papers/w11728">“Has Financial Development Made the World Riskier?”</a> And he answered it in the affirmative. The reaction from many in the room at the time was that Professor Rajan was some kind of financial Luddite. Perhaps he also thought the wheel was a bad invention?</p>
<p>The fact that he was, well, right, is interesting and important, but beside the point for the purposes of this column. The real question is what the equivalent bomb-throwing speech from a participant might be this time.</p>
<p>Hard to say, but it might be to do with 2% GDP growth being the new normal, and what that means for long term monetary policy. This has been discussed by many people, such as former US Treasury Secretary Larry Summers, so it might not be all that new. But it could be made forcefully at the very large megaphone that Jackson Hole provides.</p>
<p>Look for a speech from a noted academic suggesting that inflation targeting should be abandoned; perhaps replaced with targeting of nominal GDP growth.</p>
<p>Such a speech wouldn’t be super new, or very surprising. But it might ruffle some feathers. The Fed has a plan and they’re sticking to it. This is practical macro. I suspect they are not in the mood for an academic seminar.</p><img src="https://counter.theconversation.com/content/82892/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The annual meeting of central bankers and economics professors in Wyoming is a chance for some to send a message on the path of monetary policy.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/801862017-06-29T20:14:08Z2017-06-29T20:14:08ZVital Signs: how likely is another financial crisis? It comes down to what we believe<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (<a href="https://twitter.com/profholden">@profholden</a>). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: let’s take a break from the data and analyse why the Chair of the United States Federal Reserve says another financial crisis is unlikely in our lifetimes.</em></p>
<hr>
<p>Last week I wrote in this column that Reserve Bank of Australia Governor Philip Lowe was not taken to giving boring speeches. This week, Federal Reserve Chair Janet Yellen went him one better with <a href="http://www.britac.ac.uk/news/chair-federal-reserve-speaks-british-academy">her remarks to the British Academy</a>. </p>
<p>Yellen said of the prospect of another financial crisis like that of 2008: </p>
<blockquote>
<p>I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t think it will be.</p>
</blockquote>
<p>Her rationale was that the regulatory changes put in place since the crisis have made the system a great deal safer.</p>
<p>Yellen expressed her hope that these regulations would not be overturned, saying of attempts to do so:</p>
<blockquote>
<p>We’re now about a decade after the crisis and memories do tend to fade, so I hope that won’t be the case, and I hope those of us who went through it will remind the public that it’s very important to have a safer, sounder financial system and that this is central to sustainable growth.</p>
</blockquote>
<p>One piece of evidence supporting Yellen’s view were the so-called “stress tests” that the Federal Reserve has performed on US banks since 2011.</p>
<p>Just hours before this writing, the Fed <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170628a.htm">approved plans</a> for proposed dividend payouts for all 34 firms taking part in their annual stress tests. This is the first time since the annual stress tests began that all participating firms got a passing grade from the Fed.</p>
<p>So what should we make of Yellen’s prediction? This doesn’t have the ring of “confidence-boosting” rhetoric. It seems as though this is her genuine view.</p>
<p>At this point I should make two things clear. One: I have enormous respect for Janet Yellen, and two: I was fairly surprised by her remarks. So how does one reconcile these?</p>
<h2>We still don’t know what caused the global financial crisis</h2>
<p>It’s important to understand that the proximate cause of the financial crisis was a kind of “bank run on the system”. In a classic <a href="http://www.investopedia.com/terms/b/bankrun.asp">bank run</a> - like the ones of the Great Depression - depositors go from believing that other depositors think their banks are safe, and are therefore willing to leave their money there, to believing that others consider the banks unsound.</p>
<p>Once investors believe that other investors are going to run on the bank, they want to run too (because banks typically hold less than 10% of the cash required to pay back all depositors). In the language of game theory, there is a switch from the “good equilibrium” to the “bad equilibrium”.</p>
<p>In the financial crisis there wasn’t a run on traditional banks so much as on investment banks and other financial institutions. This led to credit markets drying up (such as the commercial debt and “<a href="http://www.investopedia.com/terms/r/repurchaseagreement.asp">repo</a>” markets).</p>
<p>What caused this shift in beliefs is a hotly debated issue. The large increase in US house prices and imprudent lending by US mortgage originators played an important role. The use of <a href="http://www.investopedia.com/terms/c/cdo.asp">collateralised debt obligations</a> (CDOs) and synthetic versions of CDOs were important. Lack of regulator controls allowed these things to happen, and incentives within financial institutions facilitated and encouraged risk and bad behaviour.</p>
<p>Yet for quite a long time the “good equilibrium” prevailed. What caused the switch?</p>
<p>That is the big question, and I’m pretty confident that not even Yellen knows the answer.</p>
<h2>It all comes down to what we believe</h2>
<p>What Yellen does seem to be saying is that regulatory responses to the crisis have made it much less likely that bad behaviour is going to occur. That certainly seems plausible. And if there is no - or very little - bad behavior, then beliefs about what other believe may not be particularly important.</p>
<p>But if there is a view that some new form of <a href="http://www.investopedia.com/terms/m/moralhazard.asp?">moral hazard</a> is taking place, and people lose faith in the regulatory regime, then perhaps 2008 could occur again. And soon.</p>
<p>As game theory - and the lessons of the classic depression-era bank runs - teach us, it all comes down to what people believe about what other people believe.</p>
<p>That seems like a pretty slippery object to me.</p><img src="https://counter.theconversation.com/content/80186/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Why does the Chair of the Federal Reserve believe there won’t be another financial crisis in our lifetimes?Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/794792017-06-15T10:52:51Z2017-06-15T10:52:51ZAs Fed ‘returns to normal,’ is the risk of recession rising? Experts react<figure><img src="https://images.theconversation.com/files/173911/original/file-20170615-26091-1bokz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fed Chair Janet Yellen speaks at a press conference following the rate-hike decision.</span> <span class="attribution"><span class="source">AP Photo/Susan Walsh</span></span></figcaption></figure><p><em>Editor’s note: The Federal Reserve’s policy-setting committee <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614a.htm">raised its benchmark interest rate</a> by a quarter-point to a range of 1 to 1.25 percent, the second increase this year. The central bank also indicated that it will likely lift rates once more this year. Given that these developments weren’t exactly a shock, we asked a couple of Fed experts what was noteworthy about the announcement.</em></p>
<h2>What’s the real risk</h2>
<p><strong>Sheila Tschinkel, Emory University</strong></p>
<p>The Fed’s <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614a.htm">decision</a> to raise the <a href="https://fred.stlouisfed.org/series/FEDFUNDS">federal funds rate</a> was no surprise to financial markets. Nor was its expectation of one more hike this year. </p>
<p>Even though core inflation <a href="https://www.bls.gov/cpi/">has been below its 2 percent target</a>, the economy’s underlying strength suggests little or no risk of recession or deflation. </p>
<p>The Fed also said it is <a href="http://www.businessinsider.com/federal-reserve-rate-hike-plan-to-unwind-45-trillion-balance-sheet-2017-6">ready to begin reducing its holdings</a> of government and other securities later this year. As a result of “quantitative easing” – the purchase of mortgage-backed and government securities to reduce long-term borrowing costs – and other measures aimed at preventing a collapse of the financial system, the value of assets on its balance sheet <a href="https://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201705.pdf">ballooned to US$4.47 trillion</a> from <a href="https://www.federalreserve.gov/boarddocs/rptcongress/annual07/sec6/c3.htm">$915 billion</a> at the end of 2007. </p>
<p>The Fed seems to believe the bigger risk, actually, is that the economy could overheat, particularly if ultra-low rates are combined with <a href="http://www.marketwatch.com/story/trumps-infrastructure-plan-could-be-a-powerful-economic-stimulus-2017-06-05">government stimulus</a> (which is still up in the air). The upshot is that the Fed seems pretty confident in the economic recovery and thinks it’s time to “begin the return to normal.” </p>
<p>Still, economic growth remains lower than many – including me – would like. It’s <a href="https://tradingeconomics.com/united-states/gdp-growth">ranged</a> from a disappointing 1 percent to 2 percent for the past few years. </p>
<p>The bigger risk facing the Fed might be that the economy is fundamentally not as strong the central bank believes it is. In that case, if the Fed continues to “normalize,” the economy could weaken and even go into recession.</p>
<p>Markets seem to reflect this view. <a href="http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart">Yields on 10-year U.S. Treasuries</a>, for example, are actually lower than they were in November, even though the Fed has lifted its target interest rate by a quarter-point three times since then. This suggests investors are still anxious about the state of the U.S. and global economies – or something entirely different could be at work.</p>
<p>Without a crystal ball, we don’t know which view is right. While I can’t explain why bond yields have declined, I do believe the U.S. economy is doing all right and the Fed is on a reasonable path to normal.</p>
<h2>The Fed’s balance sheet quandary</h2>
<p><strong>William D. Lastrapes, University of Georgia</strong></p>
<p>Today’s announcement provides the first glimpse into how the Fed hopes to downsize a historically huge balance sheet. In other words, how does it plan to <a href="https://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201705.pdf">reduce the $4.2 trillion in government bonds</a>, mortgage-backed securities and other assets it holds? </p>
<p>The Fed plans to take a <a href="http://www.businessinsider.com/federal-reserve-rate-hike-plan-to-unwind-45-trillion-balance-sheet-2017-6">gradual approach</a>. Essentially, the securities on the Fed’s balance sheet are continually maturing. As they do, the Fed has been taking the principal it collects and reinvesting it back in new securities. When the bank is ready to begin paring its holdings, it can simply stop reinvesting those proceeds, which will allow its balance to gradually decline. Or, if it would like to speed things up, it could sell some securities on the open market before they mature. </p>
<p>In other words, imagine your teenage self has seven $100 bills and you lend each to a friend in need on a different day of the week, starting on Monday, for a term of seven days. Come the following Monday, when the first bill is repaid, you decide to lend it out to someone else and continue to do so indefinitely. Essentially your balance sheet would always show $700 in assets. Then, if you decided to unwind your little bank, instead of relending the bills you began keeping them as they came due, thereby gradually reducing your assets until they hit zero. </p>
<p>There’s a flip side, however, as for every asset there needs to be a liability. And for every dollar drop in assets on the Fed’s balance sheet there needs to be a corollary decline in its liabilities. For your mini-bank, that liability might be the $700 you borrowed from your parents. And so when you stop relending those bills, you paid them back to your mom and dad, reducing what you owe. </p>
<p>The Fed borrows its money from banks in the form of “reserves” and so reduces these reserves when lending slows. And that’s where it finds itself in a serious quandary that could derail the economic recovery if not handled well. </p>
<p>Bank reserves – the safe and liquid cash assets that financial institutions hold as deposits at the Fed – <a href="https://www.federalreserve.gov/releases/h41/current/">currently total $2.2 trillion</a>, up from <a href="https://www.federalreserve.gov/releases/h41/20071227/">$5.8 billion in the last week of December 2007</a>. Almost all of these reserve holdings are excess reserves, which means they’re more than the Fed requires banks to hold in order to back up their deposits. </p>
<p>Why would banks keep so much of their portfolios in simple cash assets at the Fed and not in other securities or loans to businesses? One reason is that banks still desire safe and easily redeemable assets because of <a href="https://www.washingtonpost.com/news/wonk/wp/2017/04/21/trump-orders-another-review-of-post-financial-crisis-regulations-on-wall-street/">post-financial crisis regulations</a> and other lingering effects of the crisis. And what’s safer than the Fed, right? </p>
<p>An even bigger factor is that the Fed pays a relatively high yield on those excess reserves, now 1.25 percent, which exceeds what banks could get in comparably safe, short-term investments elsewhere. Why invest in anything else when parking that cash at the Fed is profitable and there is absolutely no default risk? </p>
<p>The problem for Chair Janet Yellen and her colleagues at the Fed is that if they try to pare back its balance sheet, banks may respond by cutting back on their own assets, such as loans to businesses and consumers, which in turn causes checking deposits and the money supply to drastically contract. The consequences are serious and include deflation and even recession. </p>
<p>So why not just reduce the rate it’s paying to the banks so that they don’t want to leave so much of their money at the Fed and instead lend it out? Increasingly, the Fed has been using interest rates on reserves as a way to help it set monetary policy and control its all-important federal funds rate. So if it lowers the interest rate on reserves, that’ll make hitting market interest rate targets that much more difficult.</p>
<p>The Fed now seems to get this and noted in its announcement that it plans to move cautiously on normalization while paying attention to the behavior of banks. The buildup of the Fed’s balance sheet during the financial was unprecedented. And now, so is policy normalization. Fed policymakers are correct to be cautious in their approach.</p><img src="https://counter.theconversation.com/content/79479/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Federal Reserve lifted rates for the second time this year and expects to do so once more, suggesting it’s fairly confident the economic recovery will continue. Is it overconfident?Sheila Tschinkel, Visiting Faculty in Economics, Emory UniversityWilliam D. Lastrapes, Professor of Economics, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/703812017-05-10T01:34:21Z2017-05-10T01:34:21ZWill Trump give working families a break?<figure><img src="https://images.theconversation.com/files/168132/original/file-20170505-19145-1dgcr43.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Families benefit when fathers and mothers get paid parental leave.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/barretthall/3469064980/in/photolist-6hxSab-79vjrz-c7Mki7-8fMUN3-8fJENc-fGCAkj-29kbuV-8qeQ2f-c3oc5y-kWePq3-3ia1Y-8PCwt2-eS8tBj-7xDV-c3or9L-9NzGHk-dqxZsc-6Jzq5p-TMP61S-dVJHxm-57YAz2-ktVpoC-c3nXYb-asSvV-8Z21eZ-8Z21QD-mbqWmb-6fCcbx-8Z56cd-8dStd6-8Z55y7-8Z22Eg-6GD7fW-kcKSw1-egzd6o-bVsGJS-JKbV8w-9NADTg-9Nzvw2-9NsZV7-fkrsZ3-9NB42k-cC4Eaj-PVPT-8tkSt9-ju8T3E-6zHp33-gXerS-5csRjx-9NDHad">popofatticus/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Federal Reserve Chair <a href="https://www.federalreserve.gov/newsevents/speech/yellen20170505a.htm">Janet Yellen</a> recently summed up the economic benefits of widespread child care and paid family leave. Since 1979, she explained in a speech at Brown University, women have brought about most gains in real household income. Making life easier for working moms helps women enter and stay in the workforce and in turn boosts economic growth, Yellen reasoned.</p>
<p>As an economics professor who researches issues that working women face, I couldn’t agree more. When more women earn income their own families benefit – along with the whole economy. And I’m heartened to see that after its initial proposal for a child care tax break that would mainly <a href="https://www.fastcompany.com/3068631/why-trumps-child-care-and-paid-leave-plan-are-fundamentally-flawed">benefit the rich</a>, the Trump administration has switched gears. It now seeks to bring relief to working families <a href="http://www.slate.com/blogs/xx_factor/2017/04/26/in_response_to_criticism_of_his_regressive_child_care_plan_trump_considers.html">farther down the economic ladder</a>.</p>
<p>According to <a href="https://www.washingtonpost.com/news/wonk/wp/2017/04/25/trump-changes-course-on-childcare-benefit-after-criticism-he-would-mainly-help-well-off-families">media reports based on skeletal details</a>, officials want to increase the Child and Dependent Care Credit, which lets <a href="http://www.taxcreditsforworkersandfamilies.org/federal-tax-credits/child-dependent-care/">working parents deduct up to US$2,100</a> from their taxes. That’s the kind of fix that would make our economy friendlier toward working moms as Yellen prescribed.</p>
<h2>More women working outside the home</h2>
<p></p><hr><p></p>
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<p>The nation’s workforce has changed dramatically since the 1950s. Back then, workplaces generally centered around male breadwinners. Stay-at-home wives did most of the caregiving. </p>
<p>In a majority of families with children today, <a href="https://www.bls.gov/opub/reports/womens-databook/archive/women-in-the-labor-force-a-databook-2015.pdf">both partners earn money</a>, do housework and <a href="http://www.pewsocialtrends.org/2015/12/17/parenting-in-america">take care of their kids</a>. Families with children have become less likely to live with extended family members able to pitch in with caregiving and more likely to be headed by single parents. In 2013, <a href="http://www.pewsocialtrends.org/2013/05/29/breadwinner-moms/">the sole or primary earner</a> was the mother in nearly 40 percent of households with children.</p>
<p>On top of the time burden, child care costs are growing. <a href="https://www.care.com/media/cms/pdf/FINAL_Care_Report_09-27-2016.pdf">Full-time care</a> for kids under four years old ran $9,589 on average in 2015 – more than the tab for in-state college tuition, according to a report from Care.com, the largest online care market, and the New America Foundation, a think tank.</p>
<p>Another burden: The U.S. is the only industrialized nation <a href="http://www.politifact.com/truth-o-meter/statements/2016/jul/25/kirsten-gillibrand/yes-us-only-industrialized-nation-without-paid-fam/">without paid family leave</a> for employees with newborns. The Family and Medical Leave Act of 1993 covers only workplaces with more than 50 employees. It guarantees unpaid time off. </p>
<p>Some companies <a href="https://www.wsj.com/articles/wall-street-perk-parental-leave-1448927064">voluntarily offer</a> new mothers and fathers paid parental leave to care for newborns and newly adopted children. Others provide paid family leave for whatever emergency arises. </p>
<p>Unfortunately, <a href="http://www.npr.org/2013/02/05/171078451/fmla-not-really-working-for-many-employees">many workers can’t even take unpaid leave</a> without jeopardizing their jobs.</p>
<h2>Child care</h2>
<p>On top of the Child and Dependent Care Credit, the federal government <a href="http://www.nationalreview.com/article/443654/child-care-paid-leave-reforms-trump-administration-congress">helps working parents save on</a> child care expenses by allowing companies to let employees use dependent-care <a href="http://www.bankrate.com/finance/taxes/irs-can-help-you-look-after-the-kids-1.aspx">flexible spending accounts</a>.</p>
<p>These FSAs help middle- and high-income workers more than low-earners with little or no tax liability – whose need for help is greater. For them, there’s the Earned Income Tax Credit. Its distribution as an annual lump sum, averaging in most states <a href="https://www.eitc.irs.gov/EITC-Central/eitcstats">between $2,000 and $3,000</a>, is ill-suited for the <a href="http://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit">cash-strapped families</a> scrambling to pay their bills year-round who are eligible for this benefit.</p>
<p>After experiencing <a href="http://www.taxpolicycenter.org/sites/default/files/publication/138781/2001170-who-benefits-from-president-trumps-child-care-proposals.pdf">widespread push-back</a>, the Trump administration recently said it would revise <a href="https://www.bloomberg.com/politics/articles/2017-02-23/ivanka-trump-is-pushing-her-500-billion-child-care-plan-on-hill">its initial proposals</a> to do more for low-income parents with limited tax liability or who pay no taxes at all. It also outlined plans for new child care and elder care savings accounts that included few details. </p>
<p>Earlier this year, The New York Times reported that the Trump administration was “contemplating” changes to its <a href="http://example.com/https://www.nytimes.com/2017/03/11/us/politics/ivanka-trump-women-policy.html?_r=0">original maternity leave proposal</a>. By giving new mothers six weeks of paid time off, even that plan would set an important precedent. But it would exclude adoptions and many increasingly common new configurations for <a href="https://www.shrm.org/resourcesandtools/hr-topics/employee-relations/pages/trump-paid-parental-leave-.aspx">American families</a>.</p>
<p>The Trump administration should ensure that all workers benefit from family-friendly tax and employment policies, not just high-paid earners and new mothers. Men and women alike should be free to take paid family leave, and all employees needing to care for their close relatives deserve an opportunity to do so without losing their jobs or obliging more women to <a href="https://www.americanprogress.org/issues/economy/reports/2013/12/12/81036/the-economic-benefits-of-family-and-medical-leave-insurance/">stay out of the labor force</a>.</p>
<p>Maximizing “women’s presence in the workplace … allows us to capitalize on the talents of our entire population,” as Yellen said. “It is also good business.”</p><img src="https://counter.theconversation.com/content/70381/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cheryl Carleton does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The nation needs a more comprehensive approach to family leave and relief for parents with child care expenses. But the proposals the Trump team rolled out initially fell short.Cheryl Carleton, Assistant Professor of Economics, Villanova UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/661962016-09-29T20:04:04Z2016-09-29T20:04:04ZVital Signs: President Trump would cause financial Armageddon<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data impacting global economies.</em></p>
<p><em>This week: Donald Trump’s criticism of the US Federal Reserve has economists worried.</em></p>
<hr>
<p>I wrote in this column <a href="https://theconversation.com/vital-signs-lowe-makes-the-case-for-good-government-debt-65728">last week</a> that if Donald J. Trump is elected President of the United States there is a real chance of “financial Armageddon”.</p>
<p>I thought that was a fairly uncontroversial statement, but a number of reader comments suggest otherwise. So allow me to elaborate. </p>
<p>This is just some of what Mr Trump proposes, should he be elected:</p>
<ol>
<li>A radical cut in a variety of taxes that the <a href="https://www.brookings.edu/opinions/donald-trumps-tax-plan-could-land-america-10-trillion-deeper-in-debt/">Brookings Institution has estimated</a> will cause at least a US$10 trillion increase in the US budget deficit over the next decade.</li>
<li><a href="https://www.washingtonpost.com/news/fact-checker/wp/2016/03/21/donald-trump-flip-flops-then-flips-and-flops-more-on-h-1b-visas/">Changes to the H1-B visa program</a>, gutting the number of skilled migrants entering the United States.</li>
<li>An <a href="http://www.nytimes.com/2016/05/05/us/politics/donald-trump-president.html">audit of the Federal Reserve</a>.</li>
<li>Violating <a href="http://blogs.wsj.com/washwire/2016/07/24/trump-threatens-to-pull-u-s-out-of-world-trade-organization/">World Trade Organization</a> agreements and raising tariffs on China and other major trading partners.</li>
<li><a href="https://www.donaldjtrump.com/policies/trade/">Renegotiating</a> almost every international agreement to which the US is a party.</li>
</ol>
<p>The US already has relatively high net debt to GDP, so Mr Trump’s tax plan puts the country’s credit rating in danger, and possibly its status as the global reserve currency. The latter would be calamitous for the cost of borrowing by the US government and US firms.</p>
<p>Immigration has underpinned the stunning innovation economy that the US enjoys. From Google to Facebook to Apple and beyond, think about how many key players were immigrants or the children of immigrants. David Brooks of the New York Times has long advocated giving a Green Card to every foreign-born PhD graduate of a US university. Mr Trump wants the polar opposite, sending bright minds with huge amounts of human capital elsewhere.</p>
<p>The Federal Reserve has helped the US economy navigate enormous shocks, provides a coherent and sound monetary policy regime, and is crucial to economic stability. Auditing it would destroy its independence and seriously undermine its long-fought for credibility.</p>
<p>Ratting on trade deals – especially with China – would likely provoke retaliation that would gut American manufacturing, make consumers poorer, and trigger a bout of global isolation. That alone could wind back the clock on nearly a hundred years of global trade and prosperity.</p>
<p>Finally, Mr Trump has seemingly made his business empire (to the extent that there is one) out of <a href="http://www.usatoday.com/story/news/politics/elections/2016/06/09/donald-trump-unpaid-bills-republican-president-laswuits/85297274/">shortchanging and stiffing</a> those he does business with. Doing so with international agreements could cause lack of cooperation on arms proliferation, human trafficking, illicit drug movements, and more.</p>
<p>In short, Mr Trump’s economic “plan” has a good chance of sending the US economy back to the Fred Flintstone era.</p>
<p>In addition to all of this, it is worth emphasising just how dangerous Mr Trump’s stance re the US Fed is. This is something he shares with libertarian candidate Gary Johnson.</p>
<p>In the first presidential debate on September 26, Mr Trump took a swipe at Federal Reserve Chair Janet Yellen, saying she and the Fed were “doing political things” through their policy of low interest rates. He went on to say something completely inconsistent with that: “When they raise interest rates, you’re going to see some very bad things happen, because they’re not doing their job.”</p>
<p>But hey, that’s Trump. Perhaps internal consistency is overrated.</p>
<p>The suggestion that the Fed is acting politically is as misguided as it is offensive. To partially paraphrase a retort from a different US Presidential debate: “I know Janet Yellen.” And I can tell you that the only thing she cares about is the health of the US economy. Moreover, the overwhelming majority of people who are informed enough to have a view think she’s doing a terrific job.</p>
<p>So, if you are one of the readers who said “Trump and Clinton are both neoliberal so what does it matter” – or if you agree with that view – then please reconsider.</p>
<p>First, labels like “neoliberal” are lazy. Just like calling someone a “pinko commie traitor”. Second, the pro-market policies that have been championed by presidents from Bill Clinton to George H. W. Bush to Barack Obama (and similarly in Australia by Bob Hawke, Paul Keating, and John Howard) have helped create enormous prosperity, lifted millions out of poverty, and permitted countless children born under the worst of circumstances to have the opportunity to flourish.</p>
<p>If being for that makes me “neoliberal” then I will wear that as a badge of honour.</p><img src="https://counter.theconversation.com/content/66196/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Trump’s economic “plan” has a good chance of sending the US economy back to the Fred Flintstone era.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/657282016-09-22T21:16:42Z2016-09-22T21:16:42ZVital Signs: Lowe makes the case for ‘good’ government debt<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data impacting global economies.</em></p>
<p><em>This week: The new RBA Governor reminds the government of its role in keeping the economy on track, and Janet Yellen holds steady on US interest rates.</em></p>
<hr>
<p>This week was all about interest rates – even though nothing really happened. For now.</p>
<p>In the United States, the Federal Reserve Board’s Open Market Committee (FOMC) left interest rates in the 0.25-0.5% band that they have been in since December last year.</p>
<p>This came as no surprise to markets. The last set of employment numbers had somewhat weaker growth than in previous months, and inflation remains subdued – below the Fed’s target of 2%.</p>
<p>At her press conference after the two-day meeting, Fed Chair Janet Yellen observed: </p>
<blockquote>
<p>“We judged that the case for an increase had strengthened but decided for the time being to wait for continued progress toward our objectives.”</p>
</blockquote>
<p>If you think that language sounds kind of “hedgy”, then you are right. Three of the regional Fed presidents (from Kansas City, Boston and Cleveland) dissented from the FOMC decision, preferring to raise rates immediately, but getting outvoted.</p>
<p>That relatively rare level of dissent (normally it is only perpetual outlier and inflation hawk Esther L. George from the Kansas City Fed who dissents) highlights the tension that Yellen faces in plotting the path of interest rate rises that are all but certain over the coming two to three years.</p>
<p>Even though unemployment has steadily declined, there is little evidence of wage pressure on inflation. There are also asymmetric risks to a hike. The December movement from 0-0.25% to 0.25%-0.5% was followed by weaker-than-expected economic numbers which caused several commentators to question the Fed’s strategy. To the extent that rise was a mistake, they don’t want to do it again.</p>
<p>Still, the market expects one rate rise before the end of the year.</p>
<p>The Reserve Bank of Australia board did not meet this week, but did release minutes from its last meeting, where they kept the cash rate on hold at an historically low 1.50%.</p>
<p>The RBA noted that the tightening of lending standards had continued to impact the housing market – but presumably that’s a good thing given previous concerns about low interest rates fuelling a housing bubble.</p>
<p>What is certainly still cause for concern is business investment, which remains weak. The minutes noted: </p>
<blockquote>
<p>“Business investment had fallen further in the June quarter, driven by a decline in mining investment in line with earlier expectations. The ABS capital expenditure survey also indicated that non-mining business investment had been little changed over the past couple of years. Members noted that uncertainty about future demand growth still appeared to be weighing on non-mining business investment.”</p>
</blockquote>
<p>The pressure on Australian interest rates is downward, with inflation very low, business investment weak, and domestic demand somewhat shaky. Still, it would be a bold call for new governor Philip Lowe to cut rates at his first meeting. On the other hand, that’s why they pay him the big bucks.</p>
<p>In Dr Lowe’s first appearance before the House Standing Committee on Economics he noted that: </p>
<blockquote>
<p>“Another option is for governments to use low interest rates to increase spending…Many of our cities could do with better transport infrastructure, Sydney among those.”</p>
</blockquote>
<p>And although he suggested that this could come from the private or public sector, it is consistent with my long-standing suggestion that government accounts be split into “good debt” and “bad debt” – the former funding productive investments, the latter funding recurrent expenditure. It seems that Dr Lowe agrees with me, despite certain conservative columnists at The Australian saying words to the effect of “I don’t like it” (that means you Judith Sloan).</p>
<p>The remainder of the year will involve a lot of watching and waiting – but the odds are the Fed will raise rates once and the RBA will cut once.</p>
<p>But a certain presidential election could change all of that. Right now the best forecasts have Hillary Clinton as a roughly 70% chance to become the next President of the United States. Before you take too much comfort in that, it means that the chance that Donald J. Trump wins is roughly the same as a professional golfer missing a 6 foot putt.</p>
<p>It happens. And if it happens on November 8 then the chance of financial Armageddon is non trivial.</p><img src="https://counter.theconversation.com/content/65728/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The odds are the Fed will raise rates once and the RBA will cut once before the end of the year.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.