Peterson Institute Update

Interview: If It's a Recovery, Where Are the Jobs?

Howard F. Rosen explains how the recession has exposed and exacerbated long-term structural trends hampering employment growth in the United States.

Interview: Discord at the International Monetary Fund

Edwin M. Truman explains why the Obama administration decided this summer to provoke a fight over IMF governance and how it might be resolved.

Four Steps to US Fiscal Health

The United States has a significant budget deficit, likely to be $1.3 trillion (10 percent of GDP) this year, and the long-term forecasts are worrying. According to the Congressional Budget Office (CBO, the leading nonpartisan experts), Social Security—together with Medicare, Medicaid, and other healthcare programs—will grow to consume almost all tax revenues by 2035.

Op-ed by Simon Johnson and James Kwak.

Interview: Pakistan's Floods: A Humanitarian and Strategic Challenge

Mohsin S. Khan assesses the damage in Pakistan, the prospects for recovery, and the threat to Western interests and to Pakistan's democracy.

Assessing the Tragedy of the Pakistan Floods

The floods in Pakistan have affected one-fifth of the country (an area roughly the size of England) and engulfed large parts of all four provinces—Punjab, Balochistan, Sindh, and Khyber Pakhtunkhwa (formerly the North West Frontier Province). The vast scope of the damage makes this a truly national disaster bearing long-term economic and political consequences for the whole country. With waters still rising, it is far too early to assess the economic costs, which will continue to mount. A proper assessment will be made in time by the government of Pakistan, assisted by the United Nations and the World Bank, but some indicators already allow for a preliminary and admittedly impressionistic view of the damage.

Policy Brief: The Road to a Climate Change Agreement Runs Through Montreal [pdf]

The 1987 Montreal Protocol to address ozone layer depletion was a pivotal agreement in the history of global environmental negotiations. It established a process that remains an important precedent for dealing with global environmental problems, including global warming. What made the negotiation of that agreement such an iconic event, and what useful lessons does it hold for climate change negotiators?

Richard Smith cites a number offactors that were critical to the success of the Montreal Protocol. For example: (1) the United States played a leadership role from the beginning, including banning the use of CFCs in most aerosols and appointing a chief negotiator with responsibility for developing the U.S. position well before the negotiations began; (2) from the outset all countries that were parties to the agreement, both developed and developing countries, made specific commitments to reduce the production and use of ozone-depleting substances; and (3) the protocol set up a procedure for regularly reviewing and revising its provisions at follow-up meetings, thus accommodating new information rapidly and efficiently. A central lesson that climate change negotiators should learn from the Montreal Protocol is that it set a process in motion, which ultimately led to all parties to the agreement making the necessary commitments to arrest and eventually reverse the deterioration of the stratospheric ozone layer.

Clearly, climate change negotiators face a more complex and far-reaching challenge today. The phaseout of ozone-depleting chemicals and related infrastructure involved major industries such as refrigeration, electronics, fire fighting, and aerosols and cost billions of dollars. But reducing greenhouse gas emissions will require fundamentally rethinking the present carbon-based societies and taking steps that will affect virtually every aspect of economic activity. Despite this significant difference in the impact on the economic structure of the countries concerned, however, there are similarities between the two challenges, and climate change negotiators would be well advised to reflect on the Montreal Protocol and the lessons that can be learned from it.

Policy Brief 10-21 by Richard J. Smith.

Mussa on CNBC 8/26 @ 8 pm: The Long Road: America Looks for Recovery

CNBC will broadcast a one-hour live special to examine the state of the economic recovery and the risk of a double dip recession. Senior Economics Reporter Steve Liesman will engage the following experts in discussion:

Michael Mussa, Peterson Institute for International Economics Senior Fellow and former IMF Chief Economist
Thomas Hoenig, Kansas City Fed President
Martin Feldstein, Harvard University Professor, President Emeritus of the National Bureau of Economic Research and Council of Economic Advisors Former Chairman
John B. Taylor Professor of Economics at Stanford University Economics Professor, Hoover Institution Sr. Fellow and Former Treasury Undersecretary for International Affairs
Diane Swonk, Mesirow Financial Chief Economist & Senior Managing Director
Maya MacGuineas, President, Committee for a Responsible Federal Budget
Dino Kos, Portales Partners Managing Director, Former NY Federal Reserve Bank Executive VP
Meredith Whitney, Meredith Whitney Advisory Group LLC Founder & CEO

Listen also to the Peterson Perspectives Interview with Michael Mussa "Is the Economic Recovery Sputtering to a Close?"

Let's Make a Deal: How to Bring the Doha Trade Talks to a Close

Originally scheduled to conclude in 2005, the Doha Round trade negotiations have dragged into their ninth year with no end in sight. The Doha Round was launched in November 2001 with the ambitious goal of liberalizing world trade and lifting living standards around the globe, especially in the least developed nations of the world. An agreement on the round would offer universal economic benefits by reducing farm subsidies, opening up new markets, and spurring investment. Yet without a final consensus on Doha, the WTO continues to lose its preeminence in the global trading system, as its members increasingly pursue trade interests, if at all, through bilateral agreements.

Op-ed by Gary Clyde Hufbauer and Robert Z. Lawrence.

Assessing India's United Progressive Alliance Government

Growth in India is on autopilot and is unlikely to be disrupted by a lapse in government control or to be boosted by policy reforms. With governance reforms out of the question for the United Progressive Alliance (UPA) government, it should focus on strengthening the public sector balance sheet and allow other reforms to be driven by growth. Strengthening the public sector balance sheet during an economic boom is a crucial lesson from the recent global economic crisis, and high growth and low interest rates in India make balance sheet consolidation necessary and attainable. While modest, the provision of the necessary resources to survive economic crises is an important item for the UPA to address.

Op-ed by Arvind Subramanian.

What Actions Should the Fed Be Taking?

It is now apparent that deflation is a more serious risk for the US economy than inflation. Both headline and core inflation are well below the 2 percent level that central banks view as optimal for economic growth and that the Fed has adopted as its goal. Recent bad news on economic growth and employment further increase the risk of plunging into outright deflation.

Op-ed by Joseph E. Gagnon.

Interview: Is the Economic Recovery Sputtering to a Close?

Michael Mussa says the latest disappointing economic numbers indicate a slower pace of growth and a possible rise in unemployment and that a return to recession cannot be ruled out.

Let's Get Privatization Right This Time Around

At a conference in Cambridge, Massachusetts, in February 1992, I and a few other advisers to Russia's young reform government discussed how to pursue privatization in the country.

Op-ed by Anders Åslund.

India's Growth Paradox

On August 15, India celebrated 63 years of independence. Many hail it as an economic powerhouse but also point to the lopsidedness of its growth. Despite being home to some of the world's leading technology companies, poverty is still widespread, physical and social infrastructure still woefully inadequate, employment opportunities still limited, and access to basic and higher education still insufficient. Nearly 40 percent of the population is still illiterate, and 25 percent is below the poverty line. India ranks 133rd (out of 183 countries) on the World Bank's ease of doing business index—169th on starting a business and 182nd on enforcing contracts—way behind several countries in sub-Saharan Africa and Latin America. As Edward Luce observed in his In Spite of the Gods: The Rise of Modern India, "India finds itself higher on the ladder than one would expect it to be. It is just that most of its people are still sitting at the bottom."

RealTime post by Arvind Subramanian.

India's Weak State Will Not Overhaul China

As India enters its 64th year since independence, its economic dynamism presents a paradox. On most measures of market friendliness, it lags behind Latin America and even sub-Saharan Africa. It is still more closed to trade and foreign capital than most other countries; still hampered by extensive controls on economic activity, including onerous labor laws; and still dominated by a large public sector. In short, it should be growing at 5 percent, not 8.5 percent, a year.

Taiwan Is Next Stop in US Reengagement in Asia

The Obama administration is showing a renewed vigor in deepening America's roots in Asia. This year, it has made a commitment to get the Korea-US Free Trade Agreement through Congress, raised the priority for a Transpacific Partnership trade agreement, and decided to seek participation in the Association of Southeast Asian Nation (ASEAN)'s East Asia Summit. These are important steps.

Op-ed by Daniel H. Rosen.

The Sun Is Rising in the East

What hand wringing there has been recently on both sides of the Atlantic as the major European economies pursue austerity in their budgets and social programs! But is it not overdone? Europeans and Americans need only look east—to the European Union's new eastern members—to see that austerity can deliver growth and improve the efficiency of the European economic and social systems.

RealTime post by Anders Åslund.

WSJ: PIIE Estimates on Renminbi Revaluation Useful to Policy Debate

Bob Davis of the Wall Street Journal examines William R. Cline's latest policy brief [pdf] in which he estimates that a renminbi depreciation would reduce the US current account deficit by $22 billion to $63 billion. Davis suggests that Cline's estimates could play a role in upcoming trade legislation.

>> Read Cline's Policy Brief 10-20: Renminbi Undervaluation, China's Surplus, and the US Trade Deficit [pdf]

Status Report on the US Economy

The global economy continues to improve, although at a disappointing pace. Sharp recessions traditionally produce rapid recoveries, but the damage wrought by the disruption of global credit in fall 2008 is far in excess of anything we have seen since the 1930s. This could be the slowest recovery of the post-war period.

Testimony by Simon Johnson.

Policy Brief 10-20: Renminbi Undervaluation, China's Surplus, and the US Trade Deficit [pdf]

The impact of China's exchange rate on both its current account balance and the US-China bilateral trade balance should not be underestimated. A 1 percent rise in the real effective exchange rate would cause a reduction in the current account surplus of 0.30 to 0.45 percent of GDP. A 10 percent real effective appreciation would bring China's current account surplus down by roughly $170 billion to $250 billion with a corresponding improvement in the US current account balance ranging from $22 billion to $63 billion, depending on which calculation method is used. William R. Cline warns that the positive trend for China's current account surplus, combined with the negative trend for the US bilateral balance, may indicate that adjustments accomplished through exchange rate correction will have a tendency to erode over time unless the renminbi successively appreciates. Special Chinese efforts to shift the economy away from external to domestic demand are important complements of exchange rate adjustment, without which the long-term trend toward a rising trade surplus could cause excess demand to grow and increase inflationary pressures on the economy.

Policy Brief 10-20 by William R. Cline.

Bloomberg: Lardy Sees Most of China Avoiding "Big" Housing Decline

Nicholas R. Lardy talks with Bloomberg's Scarlet Fu about China's housing and banking industries. China's banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets.

High Prices Will Fix What Politicians Cannot

The Gulf of Mexico oil spill was bad enough for BP to change its chief executive. It was not bad enough for the United States to change its energy policy. Last month Barack Obama, US president, used the spill to call for a new push on clean energy. But weak follow-through, a divided Democratic caucus and a unified Republican opposition saw meaningful US energy legislation shelved last week. Now, the reality of a high oil price may be about to change America's petroleum habits, even if policymakers cannot.

Op-ed by Trevor Houser.

Washington Post's Neil Irwin's Must Reads

Neil Irwin lists PIIE Senior Fellow Joseph Gagnon's Policy Brief, "The World Needs Further Monetary Ease, Not an Early Exit," as a "must read" in the debate on whether the largest economies in the world should continue or end government stimulus.

The EU Stress Tests and the Experience in Spain

In the days following publication by the European Union of the long-awaited stress tests of its banking sector, the market reaction—judged by the evolution of the euro, bank stocks, and peripheral spreads—has looked positive. This makes sense. The hundreds of pages of analysis of the impact of the stress tests have focused on individual banks, criticized the scenarios used in the stress test as overly harsh or not harsh enough, and as more or less adequate or stressful.

RealTime post by Angel Ubide.

The "Shamed Seven" EU Banks Open Their Books

On Monday, July 26, a memorable exercise in market power and the power of persuasion of those who favor financial market transparency took place. It came in the form of the last 7 remaining EU banks out of the total of 91 participating in the stress test reluctantly releasing their individual exposures to European sovereign debts. The "Shamed Seven" included 6 German banks—Deutsche Bank, Landesbank Berlin, Hypo Real Estate (failed the stress tests), DZ Bank, WGZ Bank, and Deutsche Postbank—as well as one Greek bank that had also failed the stress tests: ATEBank.

RealTime post by Jacob Funk Kirkegaard.

The Kremlin's New Policy in Its Near Abroad

In August 2008, Russia's relations with its post-Soviet neighbors reached an all-time low in the aftermath of the Russia-Georgia war. Not one single country in the region recognized the independence of Abkhazia and South Ossetia because it would have endangered its own claim to territorial integrity.

The Commonwealth of Independent States (CIS) achieved its height of ridicule at its annual summit in Chisinau, Moldova, on October 9. The headline in Nezavisimaya Gazeta said it all: "Summit in 30 Minutes. The CIS Leaders Had Nothing to Tell One Another." Of the 11 CIS members, only 6 arrived—Russia, Belarus, Ukraine, Armenia, Azerbaijan, and Kyrgyzstan, while Moldova temporarily had no president. Only one of five Central Asian presidents bothered to come. Needless to say, nothing was accomplished. To aggravate things further, President Dmitry Medvedev refused to meet Ukrainian President Viktor Yushchenko or Belarusian President Alexander Lukashenko. Everybody left quickly after the half-hour meeting. The scheduled gala dinner was canceled. The CIS is both Russia's baby and failure.

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Op-ed by Anders Åslund.

India's Inflation Puzzle

We may not know the diagnosis but the Reserve Bank of India (RBI) has administered, and has no choice but to administer, the only cure it knows: tighten monetary policy by raising interest rates and squeezing liquidity. Even if the cure works, and especially if it does only partially, it is critical to understand the underlying disease.

Op-ed by Arvind Subramanian.

Europe's Stress Tests: Only One Step Toward Banking Repair

The European banking stress test results announced on July 23 combined encouraging features with disappointing ones, which explains the paradoxical mix of reactions: Markets rose, even as many analysts denounced what they saw as a sham. Their publication is unlikely to single-handedly bring the interbank market back to soundness. But it may prove an important step, depending on what policy initiatives come next.

RealTime post by Nicolas Véron.

The EU Bank Stress Tests--What Have We Learned?

On Friday, July 23, the Committee of European Banking Supervisors (CEBS), along with national EU bank regulators and—crucially—most of the affected individual banks, finally released new data to the public regarding the stress testing of the European banking system.

What have we learned?

Appearances matter—especially for bank stress tests. So first it is clear that whoever has been in charge of media relations and communication at CEBS, the EU Commission, and elsewhere must immediately be fired (and denied any EU pension)! Despite the still fresh memory of what happened at the publication of the US Supervisory Capital Assessment Program (SCAP) tests in May 2009, which were roundly (but erroneously) criticized in the financial media and by pundits as too lenient toward the 19 banks tested, CEBS and other EU authorities carried out an inadequate and incoherent media strategy that condemned the EU stress tests to a similar fate. This is very unfortunate, as there is a lot of new value in the new data.

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RealTime post by Jacob Funk Kirkegaard.

Event: Two Years after the Crisis: The Global Economic Agenda

Undersecretary of the Treasury Lael Brainard addressed the topic of "Two Years after the Crisis: The Global Economic Agenda" at an event held July 26, 2010, at the Peterson Institute. The Under Secretary discussed the prospects for maintaining the economic recovery, repairing the global financial system and rebalancing the world economy in light of the latest G-20 meetings and recent international economic developments.

Event materials are available online.