Martin Wolf recalls his cry of Feb. 2009, and bites Obama

Sometimes, consolidating conventional wisdom is clarifying -- when the weight of evidence pushes convention toward consensus. That's what Martin Wolf's column assessing the Obama administration's economic performance to date does, or purports to do.

Wolf's conclusion: the stimulus, coupled with the Fed's emergency measures, was effective but inadequate.  Notwithstanding Larry Summers' dictum, "when markets overshoot, policymakers must overshoot too," the stimulus undershot. Citing the well-circulated conclusions of the study by Alan Blinder and Mark Zandi, as well as CBO estimates, Wolf consolidates mainstream economists' consensus that the stimulus, bailouts and Fed measures averted catastrophe, boosted GDP, mitigated the plunge in employment  --  but, as Wolf himself judged in February 2009 (and happily highlights here), was "too small, too wasteful and too ill-focused." It therefore left the country with a sputtering recovery -- and left the Democrats holding the bag.

Martin Wolf and Paul Krugman share a worry: will Obama funk reform?

Martin Wolf's assessment today of Obama's handling of the banking crisis follows the same curve as Paul Krugman's last week. Both note Obama's essential conservatism, his wish to reform with as little upheaval as possible. Both allow (Krugman grudgingly) that the sequence of bailouts, stress tests and capital raisings, coupled with cheap money from the Fed, may have saved the 19 biggest banks, providing space for them to grow their way out of crisis. Both worry that preserving the status quo will lead to another blowup. Both wonder whether Obama has the chops to impose structural reforms.

The conservatism, in Krugman's eyes, is pusillamity; Obama has decided to "muddle through the financial crisis." Wolf has a more positive view:

“If we want things to stay as they are, things will have to change.” Thus wrote the Sicilian writer Giuseppe di Lampedusa, in The Leopard. This seems to me the guiding principle of the Obama presidency...In his own way, Mr. Obama is following the path trodden by Franklin Delano Roosevelt.

On the possiblity of short-term success, here's Krugman:

It’s a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again... maybe we can let the economy fix the banks instead of the other way around.

And Wolf:

The purpose of the exercise was indeed conservative: to make it credible, though not certain, that the existing banking system and assets can survive the likely battering. This has been done well enough to satisfy the markets. But these banks will also be unable to expand their balance sheet significantly in the near future.

Interestingly, both identify the chief long term danger as failure to reform. Krugman thinks that the banks see Obama as King Log, not King Stork:

...while the Federal Reserve and the Obama administration continue to insist that they’re committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they’ll soon be able to go back to playing the same games as before.

Wolf cites more structural reasons to be skeptical that we'll get change we can believe in:

Ensuring the rescue of a financial system packed even more than before with complex and “too-big-to-fail” institutions may well be the cautious response to this crisis. But it leaves the government with the even more onerous task of imposing effective regulation in future. Unhappily, the record of regulation of generously insured financial systems is extremely poor. The mobilised self-interest of highly rewarded players easily overwhelms the constraints imposed by far less well-rewarded and almost certainly less able regulators.

The more the crisis unfolds, the more evident it is that incentives in the financial system were (and are) badly distorted. I sympathise with the conservative approach to crises, but not if it leaves in place the plethora of perverse incentives that created them. At the end of this, then, there will be one big test: will the number of institutions thought “too big to fail” be as large as now and, if so, how will they be controlled? If the answers are still not clear, there will need to be yet more change.

On the day this was published, the WSJ reported, "The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry," and Federal regulators outlined plans to regulate derivatives. First steps on a long road.

Wolf Munch Rock Award

Andrew Sullivan has announced the winners of his dyspeptic annual "awards," designed for the most part to highlight the dogmatism, intellectual dishonesty, mindless aggression, and self-promoting pretensions of our punditocracy.

As an antacid, let me introduce the first annual Wolf-Munch-Rock Award. Named for Financial Times columnists Martin Wolf, Wolfgang Munchau and Gideon Rachman, mainstays of that oasis of dispassionate analysis the FT Comment page, this award goes to an observer of world news and trends whose writings exhibit deep (if understated) expertise, fact- and evidence-based exposition, wide-angle perspective on large-scale trends, and theses based more on observation and analysis than ideology.

First year winners by decree: Martin Wolf, Wolfgang Munchau, Gideon Rachman. As an example of the way these guys deploy facts in support of a thesis --or plow through facts as they replay their search for a thesis - take Gideon Rachman's recent Five events that have defined 2007.

Rachman begins with a disarmingly modest, seemingly pedestrian justification for the 'exercise':

If you want to make sense of world affairs, it is useful to identify the most significant events. Also, I like making lists. So here goes.

Rachman's choices: 1) The surge, 2) Putin's Munich speech (accusing the Americans of "an almost uncontained hyper use of force ... that is plunging the world into an abyss of conflicts"), 3) the credit crunch, 4) Petrochina becoming the world's most valuable company (for a while), and 5) Musharrraf's 'mini-coup' in Pakistan. An odd mix of the military, the political, and the financial. Random? Bound only by his love of list-making? Not quite:

Is there a common theme linking these five events? Clearly. The link is the growing strain on the world's sole superpower. America is locked into a draining and demoralising war. Russia, an old adversary, is becoming more assertive. China, a new rival, is on the rise. Pakistan, a vital ally, threatens to fall apart. The US economy is under more strain than for years. Happy new year.

Surprise! A general unifying theory, delivered, again, with a modesty that implicitly acknowledges the complexity of events and the provisional nature of such judgments (as does the use of the perfect tense in the headline). This is not "the decline of the west," not a Jeremiad against American hubris, not a trump of doom - just a clear-headed look across disparate theaters at a "growing strain."

Wolf Munch Rock Award Part II is here
Part III is here

Wolf Munch Rock Awards II

cont. from Wolf Much Rock Awards I, here

Martin Wolf, the FT’s chief economics columnist, also wrote an end-of-year retrospective, in this case focused on the likely fallout from the subprime crisis. Like Rachman, he introduces his list of observations casually– in this case, of reasons Why the credit squeeze is a turning point for the world: “Why do I believe this? Let me count the ways.”

Wolf, like Rachman, doesn’t use lists as ideological bludgeons to suggest he’s cornered the market in causality in a neat ideological package wrapped around a simple solution. This is not “The Eight Steps Central Banks Must Take to Avoid a Depression.” In fact Wolf offers up more questions than answers:

Third, the crisis has opened up big questions about the roles of both central banks and regulators. How far, for example, do the responsibilities of central banks as “lender-of-last-resort” during crises stretch? Should they, as some argue, be market-makers-of-last resort in credit markets? What, more precisely, should a central bank do when liquidity dries up in important markets? Equally, the crisis suggests that liquidity has been significantly underpriced. Does this mean that the regulatory framework for banks is fundamentally flawed? What is left of the idea that we can rely on financial institutions to manage risk through their own models? What, moreover, can reasonably be expected of the rating agencies? A market in US mortgages is hardly terra incognita. If banks and rating agencies got this wrong, what else must be brought into question?

Those questions would seem to point toward a need for a firmer government hand on the economic tiller. But the next point tacks the other way:, toward less intervention:

Fourth, do you remember the lecturing by US officials, not least to the Japanese, about the importance of letting asset prices reach equilibrium and transparency enter markets as soon as possible? That, however, was in a far-off country. Now we see Hank Paulson, US Treasury secretary, trying to organise a cartel of holders of toxic securitised assets in the “superSIV”. More importantly, we see the US Treasury intervene directly in the rate-setting process on mortgages, in an attempt to shore up the housing market. Either, or both, of these ideas might be good ones (though I strongly doubt it). But they are at odds with what the US has historically recommended to other countries in a similar plight. Not for a long time will people listen to US officials lecture on the virtues of free financial markets with a straight face.

In fact, each of Wolf’s eight points reads like a discrete essay. Each highlights either lessons learned or questions raised, and in each case, Wolf goes where the evidence takes him. Not all of his essays are so free-form; some point toward a policy prescription. But generally, these pieces are inquiries, not briefs – essays in the original sense of “trials,” thought processes laid out on the page.

A Wolf whistle on bankers' pay

Almost two years ago, FT economics columnist Martin Wolf surprised himself (rhetorically, anyway) by seconding a proposal by Raghuram Rajan, former chief economist of the International Monetary Fund, that regulators force banks to tie bonus pay to long-term performance:

Yet individual institutions cannot change their systems of remuneration on their own, without losing talented staff to the competition. So regulators may have to step in. The idea of such official intervention is horrible, but the alternative of endlessly repeated crises is even worse.

Today, Wolf further surprises himself by calling for a windfall tax on bankers' bonuses. Here's how his case begins:

Windfall taxes are a ghastly idea. They are a sop to prejudice, a burden on risk-taking and a form of arbitrary confiscation.

So Wolf once again casts his stance as a Nixon-to-China moment. But the logic seems incontrovertible:

“Windfall” support should be matched by windfall taxes.

And in a bit more detail:

Fourth, ordinary people can accept that risk takers receive huge rewards. But such rewards for those who have been rescued by the state and bear substantial responsibility for the crisis are surely intolerable. What makes them yet more so is that the crisis has devastated the prospects of tens, if not hundreds, of millions of innocents all over the globe. The public finances will be devastated for decades: taxes will be higher and public spending lower. Meanwhile, bankers are about to reap huge rewards. This damages the legitimacy of the market economy.

Fifth, it is hard to argue in favour of exceptional interventions to bail out the financial sector at times of crisis, and also against exceptional interventions to recoup costs when the crisis is past. “Windfall” support should be matched by windfall taxes.

If a nonideological free marketer like Wolf can make this case seem watertight, there ought to be ample cover for a large Democratic majority badly in need of landing a populist blow. But then, Wolf presumably doesn't take campaign contributions.

In which Krugman borrows Martin Wolf's scalpel, possibly via Geithner

[n.b. see update in mid-post. I seem to have misread...]

In October 2010, Financial Times columnist Martin Wolf led off a column with a heroic simile to describe Obama's economic performance:

An ambulance stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later, far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone.

That is the situation in which Dr Barack Obama finds himself...more stimulus was needed. After all, it was quite modest: fiscal stimulus was less than 6 per cent of GDP and so accounts for less than a fifth of the cumulative deficits of 2009, 2010 and 2011, while monetary policy is caught in a liquidity trap.

The truth is not that policy was foolhardy and failed, but that it was too timid and so could not succeed.

Lo, now cometh Paul Krugman to review Tim Geithner's memoir:

Can electorates walk and chew gum?

Martin Wolf presents a fact-dense, closely argued version of Paul Krugman's argument: that swings toward fiscal austerity in the EU and U.S. risk stopping the global recovery in its tracks and bringing on "cyclical fiscal deficits" - that is, depressed demand which slows growth and keeps tax revenues low.  He then asks:

The best policy is to put together measures that sustain strong growth in demand in the short run, while constraining the huge deficits in the long run. This is walking and chewing gum at the same time. Why should that be so hard?

Jonathan Chait has an answer for that. Citing a Wall Street Journal op-ed lambasting Obama for "hypocrisy" for advocacting precisely Martin Wolf's prescription, which Obama has done since taking office, Chait writes:

Moore and the Republicans think it's "hypocrisy" to be for high deficits during a liquidity crisis but against them during a recovery. Really. The whole Republican message is based on not understanding this distinction.

And why don't they understand?  Because drumming up fear of deficits and loathing of short-term stimulus is working:

Larry Summers takes a long and multilateral view of China and trade rebalancing

As China signals that it is ready to start letting yuan appreciate again, Larry Summers, in an interview with the FT's Martin Wolf, gives some important hints as to the Administration's long-term approach  toward China.

With regard to exchange rates and a more general rebalancing of trade, both between the U.S. and China and more generally between high-export and high-consumption economies, two of Summers' emphases in particular are noteworthy: 1) a global rebalancing of supply and demand should be pursued through multilateral channels and institutions -- the U.S. should seek allies and so diffuse the expectation (and possibility) of gladiatorial combat between the U.S. and China over exchange rates; and  2) it's going to take time -- rebalancing the world economy is a project of years and probably decades, and yuan appreciation is only one piece in a complex (re)balancing act.

On the first point, Summers is very careful to build the multilateral context:

MW Okay, just tell me about where you are on the exchange rate question vis-a-vis China and the adjustment process vis-a-vis China.

LS The G20 made a common commitment last year in London, reiterated in Pittsburgh, to seeking more stable and balanced global growth. And I think we’ve made more progress in laying a foundation for restored global growth than has yet been made in assuring more balanced global growth - to be sure that growth, the pattern of growth over the last year, has been more balanced, with trade deficits and trade surpluses both coming down. But as the global economy recovers, it will be very important not to see a major resumption and a major widening of imbalances.

Wrestling with hope for Egypt

It is interesting to watch sober minds grapple with their hopes in the wake of the Egyptian revolution. Nowhere more so than on the Comment page of the Financial Times, where columnists based on various continents address as a matter of course the current and likely future progress of democracy (and humanity), and Fukuyama haunts the space (and not infrequently, visits in the flesh, or rather ink). 

Up today is Martin Wolf, who explains the tidal pull toward democracy in basically Fukuyaman terms -- economic pressure to compete plus an Aristotelian understanding of human nature as essentially political, determined to self-govern. Unanswered in the short space of a column is the relationship between the two: as Wolf points out, usually it's only when a country has reached a certain level of economic development that its people are equipped to express "something deep within us" that demands self-governance.  If the will to self-governance is prior to the economic conditions that unleash it, that suggests that the "democracy drive" is either evolutionary or a product of intelligent design.

As an economist, Wolf places his bet on Egypt in mainly economic terms:

Scepticism is not unreasonable. As my colleague, Gideon Rachman notes, the stability of democracy goes hand in hand with economic advance. The richer the country, the more educated its people, except where wealth comes mainly from resource rents. Again, the higher the proportion of the desperately poor, the greater the likelihood of a successful electoral appeal by ultimately ruinous populists. Finally, the poorer the country, the smaller the resources at the disposal of any democratic government with which to protect itself against its foes...

True, Egypt is a relatively poor country with a sizeable proportion of the population illiterate. Yet its gross domestic product per head, at purchasing power parity, is almost double India’s and 50 per cent higher than Indonesia’s. This does not suggest that democracy is, in any sense, inconceivable. Egypt does have a well-organised Islamist movement. But does this have to be deeply anti-democratic? This must be put to the test. Remember that Catholicism, too, was once widely thought incompatible with successful democratic government.

What interests me is, with the ground thus prepared, Wolf grapples with "naivete anxiety" while giving way, mostly, to that "something deep within us" that yearns for democracy:

A second White House Seder? Larry Summers sings Dayenu to Martin Wolf over health care reform

100-odd years ago, early in 2009, Obama and Peter Orzag were heavy on the mantra that "healthcare reform is entitlement reform"-- i.e. that "bending the cost curve"on healthcare would be the single most important step to erasing the country's structural deficit.  Here's how Peter Orzag put it in Obama's fiscal summit on Feb. 23, 2009:

Health care is the key to our fiscal future.

So to my fellow budget hawks in this room and in the rest of the country, let me be very clear: health care reform is entitlement reform.

The path of fiscal responsibility must run directly through health care.

We also must recognize that reforms to Medicare and Medicaid will only succeed in the context of slowing the spiraling growth of overall health care costs.

In an interview published in the online Financial Times today, Larry Summers, asked by Martin Wolf how other nations could have confidence that the U.S. will put its long-term fiscal house in order,  suggested that the Administration has already laid the most important cornerstone  -- again, that healthcare reform is entitlement reform, and that the cost controls in the Patient Protection Act have teeth.

Perhaps Summers was fresh from a Seder: his litany of the virtues of the Medicare Individual Payments Advisory Board (boldfaced below) swings with the repetitive glee of the Passover song  "Dayenu," which marvels at the extent of God's mercies in making the Exodus happen:

Wolf, crying; Obama, rebalancing

Can massive fiscal and monetary intervention slow and shorten a Depression?

Martin Wolf's answer: maybe, somewhat. But recovery will be slow, uncertain, fraught with danger.

Today he casts a cold eye on the present, a colder eye on the future, and walks us through four conclusions:

1) Measured by falling output and bank activity, the current crisis is worse than the great Depression.
2) Unprecedented intervention by governments and central banks is likely to break the fall to a degree.
3) Those interventions will create a whole new set of problems and dangers and will be difficult to unwind.
4) We have not begun to cope with the global trade imbalances that made the growth preceding the current crisis unsustainable.

Wolf's quick sketch of Great Depression II took my breath away. Perhaps these facts are well known to economists; they were a slap to me:

In the US, the rate of decline of manufactured output compares with that of the Great Depression. Japan’s output of manufactures has already fallen by almost as much as in the US during the 1930s (see chart). The disintegration of the financial system is, arguably, worse than it was then.

He then offers some apparent comfort in a similarly compressed overview of worldwide government response, which in the aggregate looks almost coordinated:

If the world experiences a “Great Recession”, rather than a Great Depression, the scale of policy support will be the explanation. Three of the world’s most important central banks – the Federal Reserve, the Bank of Japan and the Bank of England – have official rates close to zero and have adopted unconventional policies. The real OECD-wide fiscal deficit is forecast at 8.7 per cent of gross domestic product next year, with a structural deficit of 5.2 per cent. In the US, the corresponding figures are 11.9 and 8.2 per cent. Governments of wealthy countries have also put their healthy credit ratings at the disposal of their misbehaving financial systems in the most far-reaching socialisation of market risk in world history.

But what about the morning after?

What is most disturbing, moreover, is the scale of the policy action required to halt this downward spiral. This raises the big question: how and when might the world return to normality, with sustainable fiscal positions, strongly positive short-term official interest rates and solvent financial systems? That Japan has failed to achieve this over 20 years is surely frightening.

Not to mention the underlying problem, still to be addressed:

The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. They will not be. It will merely show that collapse does not last for ever once substantial stimulus is applied. The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future.

Wolf might have noted that Obama, for one, agrees with him about the core problem and has worked to focus the world's attention upon it. Perhaps the keynote of his G-20 appearance was this, from his April 1 press conference in London:

"In some ways, the world has become accustomed to the United States being a voracious consumer market and the engine that drives a lot of economic growth worldwide," Obama said, hinting that this position may not be sustainable. "We're going to have to take into account a whole host of factors that can increase our savings rate and start dealing with our long-term fiscal position as well as our current account deficits.

Reinforced by this, on April 3 in Baden-Baden, Germany:

...the whole point is to move from a borrow-and-spend economy to a save-and-invest economy.

Now, the U.S. will remain the largest consumer market, and we are going to make sure that it's open. One of the principles that we very clearly affirmed in London was that protectionism is not the answer. It's not the Germans' fault that they make good products that the United States wants to buy. And we want to make sure that we're making good products that Germans want to buy. But if you look overall, there is probably going to need to be a rebalancing of who's spending, who's saving, what are the overall trade patterns.

And it, by the way, it doesn't just include developed economies like Germany and the United States; it also means we want to encourage emerging markets to consume more. If you start seeing China and India improve the living standards of its people, now those are huge markets where we can sell. And that's why the last few days that I've spent talking about the international economy relates directly to the jobs that are being lost in the United States.

Talk not action, one might say. And yet, with the eyes of the world upon a new U.S. President, talk is action. When the time comes for tough negotiations about exchange rates and trade barriers, this overall strategic framework - cast as a shared framework for sustainable global growth -- will be in place.

Münchau to EU: Signal now that Eurobonds are forthcoming

Today, an eponymous Wolf Munch Rock award (so named because the truth is hard to swallow) to Wolfgang Münchau, for an op-ed that's at once a primer on the dynamics of the European sovereign debt crisis  and a powerful brief (judged on its own terms) for issuing Eurobonds sooner and working out the political implications later.

First, for the uninitiated, Münchau spells out why it's so destabilizing for the solvency of member states to come in doubt -- and why the haircut for banks holding Greek debt may have exacerbated rather than relieved the markets' panic:

I am hearing from Berlin that the German government believes that the arrival of Mario Monti as Italian prime minister is all it will take to calm the markets. This unsurprisingly complacent view misjudges the underlying dynamic of the most recent events. The cause of the panic attack was the European Council’s decision on October 26 to renegotiate the private sector participation of Greek sovereign debt holders. With that decision European leaders destroyed what was left of a functioning eurozone government bond market. Investors interpreted it – correctly in my view – as a precedent. They then dumped their Portuguese, Spanish, Italian and even French government bonds. As of now, there is only one significant risk-free asset in the eurozone – German government bonds.
The German government bond market is large and liquid, but not large enough to sustain the world’s second largest economy. The presence of a risk-free asset can hardly be overstated in a modern financial system. Each insurance company, each pension fund needs to invest part of its income in such assets. Through a combination of short-sightedness and financial illiteracy, the European Council has now put itself in a position where it desperately needs Eurobonds, if only to assure the existence of a functioning financial sector.

Next, why the European Financial Stability Facility (EFSF) is inadequate:

The party of federal debt and the path to sustainability

Lest anyone forget that Republicans have for a generation been the party of federal debt, a timely reminder from Martin Wolf:

In the case of the US, 1.8 percentage points of a 6.5 percentage point deterioration will be due to such measures. Most of the change is structural: the levels of GDP and fiscal revenue will not return to the previous path....the rise in the debt ratio is comparable to that in big wars – smaller than the second world war, but larger than in the civil war and the first world war. But this is not the first time the US has had a huge increase in its debt ratio in peacetime. The first occasion was under the Republicans between 1981 and 1992. That was when they discovered supply-side economics.

Supply-side fervor went hand-in-glove with deregulatory fervor - which, to be fair, also infected Clintonian Democrats. Hence the need for a massive course correction by the party of relative fiscal responsibility -- the Democrats.

P.S., I love EU: Rachman's startled valentine to the European Union

It's time for another Wolf Munch Rock Award - so named because the truth is often hard to digest.

It's also named for Financial Times columnists Martin Wolf, Wolfgang Munchau and Gideon Rachman, mainstays of that oasis of dispassionate analysis the FT Comment page. It goes to an observer of world news and trends whose writings exhibit deep (if understated) expertise, fact- and evidence-based exposition, wide-angle perspective on large-scale trends, and theses based more on observation and analysis than ideology.

This week's award goes to Gideon Rachman, for a column that exemplifies those virtues, garnished with Rachman's own signature understatement, irony, self-deprecation and contrarianism -- in this case directed against himself. A backhanded tribute to the European Union, the column is also a blackflipped mea culpa: I was wrong because I was right:

I am ready to retire as a eurosceptic. The European Union is in trouble. But rather than smirking – which would be the normal reaction of a sceptic – I am alarmed.

The premise is simple enough. European political union is a pipe dream, and a dangerous one. European economic union, on the other hand, "is the best example we have of international governance," a pillar of stability and prosperity. If protectionist pressures unravel the benefits of the common market, the results could be catastrophic.

What's so very interesting, though, is Rachman's personal journey from loving to hate the EU for its political pretensions to learning to love its now-endangered economic accomplishments. Even more interesting, it's the very weaknesses entailed by incomplete political union than now endanger economic cooperation. Rachman despised the pretensions, recognized the weaknesses and now trembles for the Rube Goldberg contraption that fostered European prosperity and freedom in spite of it all:

In January 2001, I arrived in Brussels with several firm and unfavourable convictions about the EU. I believed that most ordinary Europeans felt far more loyalty to their nation than to Europe. I thought that steadily enlarging the powers of Brussels was undemocratic and dangerous. I reckoned that in a crisis, nationalist instincts would come to the fore. I suspected that the EU’s new currency – the euro – was liable to run into trouble. And I believed that the Brussels-based elite was a “new class” that had confused its own interests with those of the continent of Europe.

Eight years on, I look back at these old prejudices – and smile at my foresight. The past few years have provided a graphic demonstration of the feeble popular support for the European project....The strain of the economic crisis is indeed opening up divisions within the Union. An emergency EU summit was called this weekend to combat protectionism. Several of the new EU members from central Europe are facing banking and financial crises – and the older members have refused to bail them out....

Arguably, all my darkest suspicions about the European project are about to be vindicated. So it is an odd time to renounce euroscepticism.

But it is precisely the threat to the EU that has focused my mind. Plans for a political union in Europe were always crazy. But the four freedoms already established by the EU – free movement of goods, people, services and capital – are huge and tangible achievements. It would be terrible to see them rolled back.

Appreciation for those "huge and tangible achievements" under stress focuses the mind indeed:

If Europe starts rolling back the four freedoms, the implications will stretch well beyond economics. Protectionism and nationalism are close cousins. The principles of consultation, co-operation and open borders within the EU have helped to repress the old, nationalist demons.

Protectionism and nationalism are close cousins. Variations on that warning have been plentiful on the FT comment page. It's the overriding back-to-the-future fear haunting the current crisis. But this phrasing is particularly resonant -- filtered as it is through Rachman's longstanding respect for European nationalist resistance to EU political ambitions.

Rachman closes with a trope that captures the full irony of his turnaround:

Strangely enough, I now feel a certain protective warmth towards the embattled eurocrats in their Brussels skyscrapers. This would have been hard to imagine when I arrived in the city all those years ago. But it has finally happened. I love Big Brother.

"Big Brother," it seems, has turned out to be King Log rather than King Stork.

This column epitomizes what I value in the FT Comment page. FT columnists write "essays" in the original sense -- trials, thought experiments. Often, they visibly think their way through to a conclusion -- and it's not just an empty rhetorical exercise leading us to a false eureka. Rachman, Wolf, Stephens, Munchau et al often take readers through their own uncertainties, ambivalences, fears: they frame policymakers' dilemmas with sensitivity and an appreciation for hard choices. I'm not sure how a crew with such congruent sensibilities was assembled. But in this era of newspaper meltdown, I look at the page with the same anxious don't-know-what-you've-got-till-its-under-siege regard that Rachman casts on the EU.

Chronicle of a crisis diffused?

My perception as a semi-informed layman of the latest chapter in the Eurozone crisis has been singular, and maybe worth recording.

For months, the supremely knowledgeable columnists on my favorite opinion page, the FT, along with many other observers, have played Greek chorus to an EU tragedy unfolding in several acts. Most recently, in the runup to the early December EU summit, Wolfgang Munchau, Martin Wolf, Philip Stephens and others have warned that the Eurozone is on the brink of avoidable doom. The most recent lament has been that the European Central Bank could at any given time end at least the immediate existential crisis by buying bonds Italian and Spanish government debt -- on the secondary market, since the EU charter apparently bans the ECB from buying the bonds directly. But the ECB's new president, Mario Draghi, like his predecessor, has demurred. The summit yielded only a pact for stricter enforcement of budget austerity standards, which does nothing to ease the pressure of rising interest rates.

Then, yesterday, I pick up some uncertainly-sourced snippet to the effect that banks are buying Italian and Spanish debt, those countries' interest rates are falling, and some are saying that the crisis may be over.  Yeahrright....

This morning, however, the Times' Floyd Norris brings those glimmers into focus:

Gideon Rachman takes on Krugman on Eur-austerity

Since the fullest flush of the financial crisis, Paul Krugman has been a relentless voice for stimulus, infrastructure spending and all-out war against high unemployment. Throughout his tenure at the Times, he has been so often right on fundamentals -- the Bush tax cuts, the housing bubble, the size of the 2009 stimulus -- that I would guess his credibility is unsurpassed among lay liberal readers.

So it's interesting to see a fact-based, more or nonideological commentator take on Krugman with regard to Euro-austerity. The dissenter is the Financial Times'  Gideon Rachman, repeat winner of xpostfactoid's Wolf Munch Rock award, so named because the truth is hard to digest.  Krugman calls European austerity policies "insane," Rachman notes, "with characteristic understatement."  There's a bit of a tonal joke there, methinks, because for Rachman, understatement really is characteristic.

Rachman shares the FT Comment page with Martin Wolf, Wolfgang Munchau and others who have lamented the slow-motion Eurozone train wreck these past two years -- and the drastic effects of cutting spending as economies contract. He recognizes the basic Keynesian equation. But his argument about stimulus in Europe is a kind of mirror image of progressives' take on tax cuts for the wealthy in the US: we are tapped out on that front. So is much of Europe, he argues, on infrastructure spending, government payrolls and social services:

Krugman calls for a trade war with China

When the financial meltdown was in full career, a mantra voiced by a chorus of economists, central bankers and world leaders was to avoid a cascade of protectionist measures like the round of retaliatory tariffs that magnified and prolonged the Great Depression.  "Beggar thy neighbor" -- as in protect your own market, destroy your trading partners' -- had to be the most-employed phrase on the Financial Times Comment page in 2009. Obama, a calming influence at the G-20 in late March, struck this note calling for a measured trade rebalancing on April 3:

Now, the U.S. will remain the largest consumer market, and we are going to make sure that it's open. One of the principles that we very clearly affirmed in London was that protectionism is not the answer. It's not the Germans' fault that they make good products that the United States wants to buy. And we want to make sure that we're making good products that Germans want to buy. But if you look overall, there is probably going to need to be a rebalancing of who's spending, who's saving, what are the overall trade patterns.

For the most part, the warnings held, and major economies held off from imposing major tariffs.  Yet the danger, as framed by Martin Wolf a year ago (Jan. 6, 2009), is a prolonged one, with the pressure to protect national markets increasing over time:

Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.

Now comes Nobel Laureate Paul Krugman, ringing in the New Year by demanding...our demand back.

O hear Emanuel: the deficit war may already be won

If this trend reported by Maggie Mahar holds up -- and if theSupreme Court doesn't sandbag it -- it could be worth more for America's long-term fiscal health than all the deficit reduction plans put together:

While our elected representatives wrangle over slicing entitlements, virtually no one seems to be paying attention to an eye-popping fact: Medicare reimbursements are no longer accelerating at a break neck-pace. The new numbers should be factored into any discussion about healthcare spending:  From 2000 through 2009, Medicare’s outlays climbed by an average of 9.7 percent a year. By contrast, since the beginning of 2010, Medicare spending has been rising by less than 4 percent a year. On this,  both Standard Poor’s Index Committee and the Congressional Budget Office (CBO) agree. (S&P tracks healthcare spending with the help of Milliman Inc., an independent actuarial and consulting firm.)...

Wielding power by mapping its limits

More wisdom from the FT's Philip Stephens today:

By contrast, the US president has grasped that if America is to hold on to its pre-eminent role in the world it will be within a system in which others have a stake. Mr Obama shows wisdom beyond his years in realising that to understand the extent of US power – and it is still unrivalled – a president must also map its limits.

and more:

The so-called Group of 20 – I counted 29 delegation heads round the dining table in 10 Downing Street – is a cumbersome grouping. Its reach gives it legitimacy, but at the price of operational efficiency. A smaller grouping – say, of 15 – might yet be a better answer.

Whatever the imperfections, the process promises to embed the habit of multilateralism in a multipolar world. History reminds us that big shifts in global power, such as we are witnessing, often end in war as rising states challenge the status quo. A few arguments about tax havens or bank regulation are a small price to pay for a peaceful transition.

The FT columnists, in their long collective struggle to take the measure of the economic meltdown, have been haunted by the specter of war following economic upheaval. Here's Martin Wolf:

Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.

Gideon Rachman:

If Europe starts rolling back the four freedoms, the implications will stretch well beyond economics. Protectionism and nationalism are close cousins. The principles of consultation, co-operation and open borders within the EU have helped to repress the old, nationalist demons.

Nice to see a glimmer of optimism from Stephens.

P.S. My one beef with Stephens is that he's fond of straw men:

Those who view politics as an event rather than a process will have been disappointed. So also will those expecting, or pretending to expect, that the summit would fix the global economy. The world is too complex for the instant gratification demanded by 24-hour rolling news channels.

I read a lot of predictions that the summit would be a disaster - none that it would "fix" much of anything. Pleasant surprise, a la Stephens, seems to be a hear-universal reaction. Someone did a nice job lowering expectations. Or was that a broad-based defense mechanism?

P.P.S. Strobe Talbott makes much the same point about Obama's core message to the world as Stephens:

“President Obama embraced, and made his own, a shift in attitude towards a much more pluralistic world order in which the United States is still uniquely influential by virtue of its ability to persuade,” says Mr Talbott. “In essence, President Obama managed to identify himself with a form of American statesmanship that recognises the difference between being a leader and being a boss.”

And from the horse's mouth:

“There has been a lot of comparison here about Bretton Woods [the 1944 conference that set up the postwar economic order],” [Obama] said. “Well, if it is just Roosevelt and Churchill sitting in a room with a brandy – you know, well, that’s an easier negotiation. But that’s not the world we live in. And it shouldn’t be the world that we live in. It’s not a loss for America. It’s an appreciation that Europe is now rebuilt and a powerhouse. Japan is rebuilt, is a powerhouse. China, India, these are all countries on the move. And that’s good.”

Yes, it's good. And it's good to hear an American President say it.

Summers channels Krugman chanelling Uncle Sam(uelson)

Compare Larry Summers' message at Davos (relayed by Gideon Rachman) to Paul Krugman's shot across China's bow back on New Year's Day.

Summers:

Larry Summers, the chief economic adviser in the White House, was rather more subtle in his flirtation with protectionism. He told the Davos audience that one in five American men aged between their mid-20s and their mid-50s is now out of work. In the 1960s, he pointed out, 95 per cent of this age cohort had been employed. Mr Summers was careful to say that the US remains committed to open trade and can gain from globalisation. But he also pointed out that Paul Samuelson, a famous economist (and uncle of Mr Summers), had argued that the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies. The reference to China did not need to be spelled out.

Krugman:

I usually hear two reasons for not confronting China over its [mercantilist] policies. Neither holds water....

...there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.