Peterson Institute Update

Interview: Stormy Weather After US-China Summit

Nicholas Borst explains that pledges between Presidents Obama and Xi to cooperate have been undercut by recriminations over cyber espionage.

Getting Germany Past Internal Devaluation

Cheap labor is no basis on which a rich country should compete. Yet, that has been the basis of the lion's share of Germany's export success in the last dozen years—and exports have been the sole consistent source of economic growth for Germany over the same period. For too long, the idea that trade surpluses somehow prove a nation's economic worth has persisted in Germany. The resulting false sense of security has combined with the problems of Germany's southern neighbors in the euro area to make it seem that everything in the current coalition's economic policies, and with the German economy, is as good as it needs to be. But it is not.

Op-ed by Adam S. Posen.

The TTIP Logic in Obama's Trip to Berlin

Second term presidents have unfinished business, so it is no surprise that President Obama plans to speak later this month in Berlin at Brandenburg Gate, where Germany asked that he not speak in 2008. Aside from the occasion of the 50th anniversary of John F. Kennedy's famous "Ich bin ein Berliner" address, Chancellor Angela Merkel has many good reasons to invite him this time. Her approval ratings are high, but it can't hurt to hobnob with Obama, who is still popular in Germany. Her main motivation, however, is that she has business of her own to take care of.

RealTime post by Jacob Funk Kirkegaard.

Saving Abenomics: No Time for Cold Feet on QE

Prime Minister Shinzo Abe captured the attention of economists, pundits, and global markets with his bold plans to boost growth and inflation in Japan. Stock prices soared, real bond yields plummeted, and the yen dropped sharply. These trends boded well for Abe's success. More recently, markets seem disappointed with the details (or lack thereof) on Abe's structural reforms and the unwillingness of the Bank of Japan (BOJ) to implement its quantitative easing (QE) plans flexibly. In this post I focus on what the BOJ should do to achieve its inflation goal and how that will help reduce the long-run burden of Japan's large national debt.

RealTime post by Joseph E. Gagnon.

Conference: Payoff from the World Trade Agenda

The Peterson Institute and the International Chamber of Commerce (ICC), in partnership with the United States Business Council for International Business and the Center for Strategic and International Studies, held a conference for the launch of the PIIE–ICC Foundation study, "Payoff from the World Trade Agenda," on June 14, 2013. Robert B. Zoellick, former president of the World Bank and former US Trade Representative, presented the keynote speech.

Where Europe Works

With Swedish cities roiled for weeks now by rioting by unemployed immigrants, many observers see a failure of the country's economic model. They are wrong. The Swedish/Scandinavian model that has emerged over the last 20 years has provided the only viable route to sustained growth that Europe has seen in decades.

Op-ed by Anders Åslund.

Solar Panels: When Trade, the Environment, and Geopolitics Collide

What happens when policy goals in one area collide with goals in another? This occurred when US and European manufacturers of solar panels squared off with environmental and geopolitical interests over cheap Chinese products. In the United States, domestic producers of solar panels succeeded in raising tariffs on Chinese imports, even though their victory made solar energy more expensive and less competitive for American consumers. A similar scenario was repeated last week when the European Union imposed antidumping duties on Chinese panel manufacturers.

RealTime post by Caroline Freund.

Event: Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States

The Peterson Institute released a new Policy Brief, Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States, by Arvind Subramanian, the Institute's Dennis Weatherstone Senior Fellow, on June 11, 2013. Joseph Nye of Harvard University and Kurt Campbell, CEO of the Asia Group, discussed Subramanian's proposals.

Event materials are available online.

The Danger of Politicized Foreign Investment Reviews

At their Sunnylands summit this week, President Obama and China's President Xi Jinping are sure to discuss American attitudes toward Chinese investment in the United States. The announced takeover of US pork producer Smithfield by China's Shuanghui has stirred a public debate about foreign takeovers in the United States. Not surprisingly, many Americans have squealed at the idea of a Chinese firm with its hands on their morning bacon. And some experts are calling for an expansion of foreign investment reviews beyond just national security to include a wide range of public policy goals including food safety or labor rights. However, such an expansion of US investment screening would do little to address existing concerns while opening the door to protectionist abuse.

Op-ed by Daniel Rosen and Thilo Hanemann.

Interview: New Dangers of a Debt Ceiling Confrontation

Simon Johnson says the economy is growing but that another debt ceiling battle later in 2013 would disrupt the progress.

Gazprom's Demise Could Topple Putin

No large company in the world has been so spectacularly mismanaged as Russia's state-dominated natural-gas corporation, Gazprom OAO (GAZP). In the last decade, its management has made every conceivable mistake.

Op-ed by Anders Åslund.

Interview: Lingering Prospects for US Financial Reform

Simon Johnson says that despite a push back from the financial industry, Congress is taking a close look at increasing capital requirements for banks.

Interview: Market Volatility in Japan: A Verdict on Abenomics?

Adam S. Posen says the market turmoil in Japan may actually be a sign that Prime Minister Abe's economic policies are working.

Latvia Is Approved by the European Union for Euro Adoption

On June 5, the European Commission and the European Central Bank (ECB) issued their convergence reports on Latvia, declaring that it is ready to adopt the euro starting on January 1, 2014. The announcement marked the decisive turning point by the European Union, even if several formal steps remain for the next month. Latvia will become the 18th member to adopt the euro.

RealTime post by Anders Aslund.

The Sunnylands Summit: Power for Purpose

When Presidents Obama and Xi Jinping meet for a historic private summit this week, the California desert air will be rife with the rhetoric of cooperation and partnership. The reality is that the two countries are engaged in indirect economic skirmishing that could slowly corrode the rules-based multilateral economic system, embodied in the International Monetary Fund (IMF), World Bank, and the World Trade Organization (WTO).

RealTime post by Arvind Subramanian.

The Fiscal and Economic Effects of Austerity [pdf]

Continuing uncertainty around the US federal budget in general, and the debt ceiling in particular, is not helpful—and may prove destabilizing both at home and around the world. Another round of confrontation over the debt ceiling would not be helpful to growth or employment. A sudden move towards further tightening of fiscal policy in the United States could have similar results. There is no meaningful evidence that the United States needs to cut federal deficits dramatically this year, or even over the next five years. There is no threshold for US federal debt, either gross or net, that would necessarily trigger slower growth or higher bond yields or any other economic problem. There is a danger that the United States will inflict upon itself an unnecessary and damaging degree of austerity. The United States should instead be building an economy within which federal revenue can be robust, and public spending growth can be contained over the next decade.

Congressional Testimony by Simon Johnson.

Policy Brief 13-16: Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States

When the new Chinese leader, Xi Jinping, meets with President Barack Obama this month, they will have a lot to talk about. In the economic sphere, the paramount challenge for the two leaders is to overcome what might be called the Kindleberger Conundrum: the preservation of the open, rules-based multilateral economic system against the background of the historic shift in which the rising power (China) might be unwilling to sustain it at a time when the declining power (the United States) is increasingly unable to single-handedly shoulder the burdens of leadership. The two nations must overcome their mutual wariness and strike a Power-for-Purpose Bargain: The United States would give up power in existing multilateral institutions in return for China taking on greater global leadership to preserve the system's real purpose.

Policy Brief 13-15 by Arvind Subramanian.

Policy Brief 13-15: Estimates of Fundamental Equilibrium Exchange Rates, May 2013 [pdf]

In this semiannual update, William R. Cline presents new estimates of the fundamental equilibrium exchange rates (FEERs). This update takes the medium-term projections of current account balances in the most recent World Economic Outlook of the International Monetary Fund as its point of departure. Once again it is found that the key cases of the United States and China involve only modest over- and undervaluation, respectively, in contrast to the 2006–07 period when the imbalances for the two economies were extreme and much larger exchange rate corrections were needed. The study concludes by adding a variant of the calculations in which rich countries with prospective current account deficits are set a floor target of at least a zero current account balance, and emerging market economies are set a ceiling target of zero balance. The premise is that in a more balanced international economy capital would flow from rich to poor countries rather than "uphill" in the reverse direction.

Policy Brief 13-15 by William R. Cline.

Interview: A New US-China Relationship? Part II

Nicholas R. Lardy says the Chinese leadership's stated intention to liberalize the domestic economy could portend important changes sought by the United States.

Policy Brief 13-14: Shadow Deposits as a Source of Financial Instability: Lessons from the American Experience for China [pdf]

Shadow deposits in China have emerged as a potential source of financial stability. Nicholas Borst suggests that US experience in regulating shadow deposits offers useful lessons for China to guide its own financial development in a healthier direction.

Policy Brief 13-14 by Nicholas Borst.

Interview: A New US-China Relationship? Part I

Nicholas R. Lardy assesses the outlook for the Obama–Xi Jinping Summit in California on June 6-7.

Policy Brief 13-13: Sizing Up US Export Disincentives for a New Generation of National-Security Export Controls [pdf]

In the early 1990s, US export controls that aimed to keep high-tech goods and technologies out of the hands of enemies deterred from $15 billion to $25 billion of such exports. Recent US export controls seem to deter US high-tech exports considerably less. As percentages of seven broad industrial categories of high-tech exports, estimated American export shortfalls from national security controls have fallen from roughly 5 percent in the early 1990s to slightly over 1 percent in the mid-to-late 2000s. Ongoing reform of American national-security export controls would seem to have only modest effects on the level of US high-tech exports. American exporters seem to have developed a distinctive competitive ability to shift their sales efforts flexibly among customers and products that are subject to tight, loose, and few controls. Important importing countries seem to have developed a distinctive ability to shift their sourcing flexibly among alternative suppliers, including a growing set of emerging exporters of high-tech goods. They are, however, still denied half of their potential high-tech imports from the ten exporters from which the authors draw their estimates.

Policy Brief 13-13 by J. David Richardson and Asha Sundaram.

News Release: Global Search Underway to Fill Newly Created C. Fred Bergsten Senior Fellowship

WASHINGTON–The Peterson Institute for International Economics has begun a global search to fill its newly created C. Fred Bergsten Senior Fellowship. The Executive Committee of the Institute's Board unanimously decided to newly endow a chair in honor of Dr. Bergsten, recognizing his 32 years of leadership at the Institute, and 45 years at the center of international economic policy debates.

Read full news release.

Managing International Capital Flows: The IMF's "Institutional View" Falls Short

Members of the International Monetary Fund (IMF) and the staff and management of the Fund should be congratulated for taking up the complex and vexed topic of international capital flows and reaching consensus on an "institutional view" to help guide their discussions and advice. They have taken an important step toward an improved understanding of and dialogue about the policy issues.

RealTime post by Edwin M. Truman.

The IMF Revisits Sovereign Debt Restructuring, Not the SDRM

A long-awaited overview paper [pdf] on sovereign debt restructuring from the International Monetary Fund (IMF) is here, the first since 2005. And it does not revive the Sovereign Debt Restructuring Mechanism (SDRM) proposal, which died in 2003 at the hands of the United States and the big emerging markets. As the new paper explains politely, SDRM "failed to command the majority needed ... due to the members' reluctance to surrender ... sovereignty" a decade ago. It then takes great pains to establish that the core political reality has not changed, even though SDRM would have solved many of the problems with sovereign debt restructuring that have arisen in the interim.

RealTime post by Anna Gelpern.

Peterson Perspectives Interview: Are Tax Avoidance 'Havens' a Bad Thing? Part II

Nicolas Véron says Europe has taken a step forward in requiring European banks to exchange information to crack down on tax evasion.

Self-Defeating Austerity and the Improved US Fiscal Outlook

Last week, Tyler Cowen of the blog Marginal Revolution asked "Have we seen self-defeating austerity in the United States?" Cowen declines to take a clear stand on the question, but his main point is that the well-known fiscal cuts of 2012 and 2013 have, in fact, reduced the US budget deficit. Ergo, goes the implication, austerity was not self-defeating.

RealTime post by Joseph E. Gagnon.

Peterson Perspectives Interview: Are Tax Avoidance 'Havens' a Bad Thing? Part I

Nicolas Véron explains why low-tax havens in Europe like Ireland and Luxembourg are a legitimate business model and will be hard to suppress. In Part II: A Step Forward on Disclosure

Will the Pacific Alliance Succeed in Latin America After Other Trade Pacts Have Failed?

Pacific Alliance fever has set in. This trade grouping—which joins together the economies of Chile, Colombia, Mexico, and Peru—is holding its seventh summit on Thursday in the western Colombian city of Cali with more and more attention being paid throughout the region. The alliance has been lauded as "the most exciting thing going on today in Latin America" by Chile's Finance Minister, characterized by the Economist magazine as a "hard-nosed business deal," and crowned as "a new Latin American superpower" by MoneyWeek.

RealTime post by Barbara Kotschwar.

Congressional Testimony: European Union Economic Relations: Crisis and Opportunity

While the purpose of today's hearing is not to rehash what led to the economic challenges currently facing the European Union, I would like to start my testimony with a reminder that the European Union is fundamentally a political project. Although the euro, as a common currency, is obviously an economic instrument, its introduction within the European Union remains principally an outgrowth of political motivations. Somewhat paradoxically, to understand European economic issues, one needs to always look primarily through a political prism.

Congressional Testimony by Douglas A. Rediker.