Revanchist China

John Lee

25 February 2013.

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SYDNEYIn a speech at the Center for Strategic and International Studies in Washington, DC, on February 22, Japanese Prime Minister Shinzo Abe informed the audience of officials, experts, and journalists that Japan is “back” and will not stand down in its ongoing sovereignty dispute with China over the Senkaku/Diaoyu Islands. With Chinese provocations on the rise, US President Barack Obama, Abe’s host, appealed for calm and restraint on both sides.
Japan is likely to accedegrudgingly – to America’s request, as it remains dependent on its alliance with the US for its security. But it will be much more difficult to persuade China that it should stand down.
China’s assertiveness over its sovereignty claim reflects more than a desire to exploit seabed resources, or to gain a widened strategic gateway into the western Pacific. It is also about national renewal and rejuvenation – the core of the Chinese Communist Party’s raison d’être. Turning away from a fight with its former occupier and historical rival would be a step backward in this six-decade-long quest.
The idea of Chinese renewal or rejuvenation was popularized by then-Premier Zhao Ziyang in the late 1980’s, and frequently promoted by Presidents Jiang Zemin and Hu Jintao. Most recently, incoming President Xi Jinping, visiting the National Museum of China’sRoad Toward Renewalexhibition, pledged to continue the “great renewal of the Chinese nation.”
What doesrenewal” or “rejuvenationmean to the Chinese? All nationsgreat and small embody a combination of historical fact and myth. In this case, the CCP’s view of rejuvenation is built on the belief that the zenith of Chinese power under the Ming and Qing dynasties represents the natural, just, and permanent state of affairs for a 5,000-year-old civilization.
When Mao Zedong took power in 1949, his immediate goal was to re-establish the “greater China” of the Qing Dynasty (1644-1912), insisting that the Manchu-led empire was the permanent and enduring China. But, while the assault on the Qing Dynasty by foreign powers is a historical fact, the notion that there has been one enduring China struggling against avaricious outsiders across several millennia is false and self-serving.
Mao achieved his goal following the so-called peaceful liberation of the East Turkestan Republic (now Xinjiang) in 1949 and the invasion of Tibet in 1950, which promptly increased China’s size by more than one-third. And every CCP leader since has carried forward his vision of a greater China, adjusting and expanding it as the country’s power grows. For example, China showed little interest in the Senkaku/Diaoyu Islands prior to 1968 – the year a geographical study pointed to vast oil reserves beneath the seabed.
The same can be said for China’s growing stridency with respect to its claims in the South China Sea. In 2009, relying heavily on a dubious historical claim, China formally tabled its nine-dotted linemap to the United Nations Commission on the Limits of the Continental Shelf, and has since referred to almost all of the South China Sea as being under its “indisputable sovereignty.”
Having dominated East and Southeast Asia for all but the last two centuries of the past two millennia, China is chafing at the current US-led regional order of sovereign states, in which even the smallest enjoys the same rights, privileges, and protection as the largest. Modern China has benefited enormously from this arrangement; nonetheless, there is keen resentment that the Chinese civilization-state’s vast achievements over several thousand years offer China no special status.
To a people imbued with a deep sense of superior moral worth, historical achievement, and victimization by foreign powers, this state of affairs is unjust and unnatural. It follows that pulling back from any territorial dispute with smaller and inferior states would be seen as a humiliating defeat, rather than a step toward ensuring long-term regional stability.
Moreover, an expanding view of greater China implies that a resolution of the dispute over the Senkaku/Diaoyu Islands in China’s favor would be likely to embolden rather than satisfy its ambitions. Making good on its claim to the South China Sea could be next.
As Obama and Abe forge a common strategy aimed at helping to manage China’s rise peacefully, they must understand that China’s conception of renewal seeks to resurrect a glorious past, and that this implies revision, not affirmation, of the existing regional order. This means that they will have to limit China’s strategic and military options, even if they cannot constrain its ambitions.
Copyright Project Syndicate -

America’s Sequestered Recovery

Laura Tyson

25 February 2013

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BERKELEYThe United States is confronting another round of cuts in federal government spending, this time threatening to trim at least 0.5 percentage points from GDP growth and to precipitate a loss of at least one million jobs. Automatic across-the-board spending cuts, the so-calledsequester,” would reduce spending by $85 billion, with defense programs cut by about 8% and domestic programs by about 5% this year – and with additional cuts of comparable dollar amounts every year until 2021.

All major government functionsnational security, foreign aid, basic research, emergency relief, and education, to name a few salient examples – would experience an immediate and sizeable funding hit. These cuts, along with the tax increases agreed to in January, would knock about 1.25 percentage points off 2013 GDP growth, consigning the economy to another year of tepid recovery and disappointing job gains.

The real aim of the sequester’s advocates is a smaller federal government – a goal that often is cloaked in the argument that excessive government spending is choking economic growth. Although this is a politically compelling argument, because it stokes public fears about an out-of-control deficit, it flies in the face of the facts.
Anemic government spending, not profligacy, has been a major factor behind the economy’s lackluster recovery. According to a recent report by the Congressional Budget Office, large spending cuts by state and local governments – and, more recently, a significant reduction in federal spending – have contributed to the unusual and prolonged weakness of aggregate demand.
In recent speeches, US Federal Reserve Chairman Ben Bernanke and Vice Chair Janet Yellen have described fiscal policy at the local, state, and federal levels as a powerful headwind slowing the economy’s return to full employment. In the year after the recession ended, discretionary spending at the federal, state, and local levels boosted growth at about the same pace as in previous recoveries.
But, since then – and in sharp contrast to previous recoveriesfiscal policy has become contractionary, reducing aggregate demand and restraining growth. State and local governments have cut spending and payrolls significantly. And federal purchases of goods and services have been declining since 2010, when the temporary additional spending in the 2009 stimulus package came to an end.
Even without the sequester, real per capita government spending (including both purchases and transfer payments) has declined under President Barack Obama, while it increased under every preceding president since Richard Nixon. (Indeed, per capita spending growth was much faster under the Republican administrations of Ronald Reagan and George W. Bush than it was under Democratic Presidents Jimmy Carter and Bill Clinton.) And, even without the sequester, the federal budget deficit is set to fall at a faster pace during the next two years than in any two-year period since demobilization after World War II.
As a result of a deep and persistent deficiency in aggregate demand, the US economy has been operating far below its potential output level. Real GDP fell by 8% relative to its noninflationary potential in 2008-2009, and has remained about 8% below its previous growth path ever since.
This translates into about $900 billion of foregone goods and services this year alone – a tremendous waste reflected in an unemployment rate of 7.9% and a poverty rate of 15%, significantly higher than the average of the past 30 years. And the waste accumulates over time: the longer the economy operates far below its capacity, the slower the growth in its future capacity as a result of diminished risk-taking, foregone investment, and erosion of the skills base.
The significant loss of current and future potential output is all the more remarkable, because it has occurred despite a sustained and unprecedented effort by the Fed to boost demand and hasten the recovery. Fed officials have repeatedly expressed concern that the prolonged weak recovery will inflict future pain in the form of slower long-run growth.
Motivated by this concern, the Fed has held the nominal short-term interest rate near zero – its effective lower bound – for more than five years, with a promise to keep it there until 2015, and has been purchasing about $1 trillion of long-term government bonds each year. As a result, the nominal yield on the ten-year Treasury bond, a widely used measure of the federal government’s borrowing costs, hovers around 2%. That is higher than the record low of 1.4% hit in 2012, but less than half the pre-2008 level and less than a third of its 40-year average. In real terms, both short-term and long-term interest rates remain in negative territory.
Recent research has found that the multiplier for discretionary fiscal policy – the change in output caused by a change in discretionary government spending – is larger when nominal interest rates are low and there is a significant amount of underutilized resources. These conditions describe the US economy as it faces yet another round of government spending cuts that would have negative multiplier effects on GDP and job growth.
Indeed, these effects are likely to be larger than expected compared to conventional multiplier estimates, which rest on two assumptions: the economy is close to full employment; and the contraction in demand caused by a cut in government spending will be offset by a drop in interest rates. Neither assumption applies today.

Even worse, the sequester’s across-the-board spending cuts make no distinction between effective and essential programs and programs that represent special interests or have outlived their original purpose. Such arbitrary cuts are likely to inflict more damage on the economy than sensibly targeted cuts of the same magnitude.
The sequester is the product of ideology and political stalemate. It has no economic justification. In the long run, additional targeted spending cuts will be necessary as part of a balanced package to stabilize the debt/GDP ratio. But they are not necessary now. Indeed, by endangering the economy’s halting recovery, they would be counterproductive.

Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.


Updated February 24, 2013, 11:18 p.m. ET

A Silver Linings Deficit Playbook

This may be hard to believe after so many years of bad news, but the federal budget picture is improving.



Cheer up, America. Yes, it's February. But spring training has begun, the days are growing longer, the weather is getting warmer, and—are you ready for this?—the federal budget picture is improving.

Yes, improving. After so many years of bad budgetary news, this may be hard to believe. The public mood certainly seems stuck in a rut of despair and dismay. But budget mavens have noticed several significant developments:

Despite seemingly unending political battles, Congress and the president have managed to agree on several measures that reduce the projected 10-year deficit considerably. In addition, the Congressional Budget Office has quietly lowered its deficit projections, in part due to changes in the underlying economic forecast and in part due to changing cost estimates for health care and other items. The country also avoided the dreaded Jan. 1 "fiscal cliff" and pushed the even-more-dreaded collision with the national debt ceiling back to at least May. Meanwhile, Republicans are talking far less menacingly about either shutting the government down or precipitating a debt crisis.
Phil Foster

About the only bad budgetary news has been the increasing likelihood that the sequester—that's Latin for "cutting federal spending stupidly"—will actually occur on March 1. If deficit hawks were to tally the score since President Obama and House Speaker John Boehner failed to reach a "grand bargain" in August 2011, they might start adding smiley faces to their text messages.

Let's stack these recent developments up against the goal set in the summer of 2011: to chop about $4 trillion off the deficits projected for the next 10 years.

While the grand bargain talks dissolved in acrimony, they did produce the Budget Control Act of 2011. That law created land mines like the fiscal cliff, but it also cut spending by over $1.9 trillion once you include the associated interest savings, as you should. (Here and elsewhere, I use the 10-year budget window 2014-2023 and recent estimates from the widely respected Center on Budget and Policy Priorities.) That was all spending cuts, no tax increases.

Then came the New Year's Day agreement that averted the cliff. The headline number then was about $600 billion in tax increases. But if you add in the spending cuts and the associated decrease in debt service, it came to another $850 billion or so.

Adding these up, the two budget agreements have taken us more than two-thirds of the way toward the $4 trillion deficit-reduction target. Close enough, in fact, that the sequester, if it happens, will nearly finish the job.

Now, don't get me wrong. I don't welcome the sequester. Its meat-ax approach chops spending bluntly and indiscriminately. But imagine that our legislators agree instead on a smarter package of spending cuts and revenue raisers that amounts to the same amount of money. After all, it's only about 0.6% of GDP. Then we'll have achieved the $4 trillion target. The Center on Budget and Policy Priorities estimates that doing so would be enough to stabilize the debt-to-GDP ratio at about 73%, which is a sensible goal for now.

Deficit hawks will object that the original $4 trillion goal applied to fiscal years 2012-2021. When you roll the budget window forward to 2014-2023, substantially larger cuts are needed to keep the debt-to-GDP ratio from rising. That's true. But, during that same period, the CBO's technical and economic re-estimates have made the deficit target substantially easier to reach. If you do the math, the two adjustments come close to cancelling out one another. So a number like $4 trillion remains a reasonable target for policy changes.

One factor behind CBO's re-estimates has been a remarkable decline in the rate of increase of health-care costs. Medical costs are still rising, but at a far slower rate than looked likely only a few years ago. Writing in the New York Times this month, Ezekiel Emanuel, a physician and professor at the University of Pennsylvania, branded this development "truly a sea change."

Seas change slowly. But the numbers Dr. Emanuel cited are dramatic. Between 1965 (when Medicare was founded) and 1993 (when Bill and Hillary Clinton tried to curb medical costs), health-care spending grew 3.2 percentage points faster than GDP.

Since 2004, that gap has been shaved to a mere 0.8 percentage point. And the more recent news is even better. Over the past three years, according to Dr. Emanuel, Medicare costs have actually grown slower than GDP.

Some of this "cost control" is due to the weak economy: Hard times lead people to postpone or cancel some medical care. But health-care inflation began to fall years before the recession began, which suggests that deeper forces are at work. If we can somehow slow health-care costs to the rate of GDP growth, our long-run budget problem is basically solved. It's far too early to declare victory, but there's reason for hope.

Finally, while the Republicans are not about to roll over and play dead, their budget rhetoric has become notably less belligerent of late. In particular, several GOP leaders, including House Speaker John Boehner and House Budget Committee Chairman Paul Ryan, have said either that they don't want to shut down the government when the current stopgap budget expires on March 27, or that they don't want to threaten default on the national debt, or both. Hooray for that.

Three lessons emerge from these improvements in the budget outlook. First, sometimes the news is good; we should not routinely assume the worst. Second, mirabile dictu, all that political warfare actually got us somewhere. Third, with a stable debt-to-GDP ratio now in sight, the fixation on reducing the budget deficit, to the exclusion of all other national goals, seems strangely anachronistic. The nation has other priorities, toosuch as faster growth and more jobs.

Mr. Blinder, a professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve, is the author of "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead" (Penguin, 2013).

February 25, 2013

Italians Reject Austerity, but Split Vote May Mean Gridlock


ROMEItalian voters delivered a rousing anti-austerity message and a strong rebuke to the existing political order in national elections on Monday that threatened to plunge the country into political paralysis after early results failed to produce a clear winner. Political experts said the situation would most likely lead to a shaky coalition government and once again expose Italy and the euro zone to turmoil if financial markets question the new government’s commitment to measures that have kept the budget deficit within a tolerable 3 percent of gross domestic product.
In an election marked by voter anger and low turnout, the center-left Democratic Party appeared to be leading in the Lower House with a third of the votes counted and in the Senate with two-thirds of the votes counted by 8 p.m. local time. But the results were not a clear victory, because the center-right People of Liberty Party of former Prime Minister Silvio Berlusconi was leading in several populous regions that carry more Senate seats, raising the prospect of political gridlock.
Even without a final result, the election was a victory for the Five Star Movement of the former comedian Beppe Grillo, which in its first-ever national elections appeared, at this stage of the count, to win 25 percent of the vote in the Lower House. Italians from both right and left — and the wealthier north and poorer south — were drawn to Mr. Grillo’s opposition of austerity measures and cries to oust the existing political order.
And it was a stinging defeat for the caretaker prime minister, Mario Monti, a newly minted politician whose lackluster civic movement appeared to win around 10 percent in both houses. Grillo had a devastating success; the rest of the situation is very unclear,” said Stefano Folli, a political columnist for the business daily Il Sole 24 Ore.
Either the center-left and center-right “will form a grand coalition committed to reforms and changing the electoral law, which would be very difficult, or Italy will be ungovernable,” Mr. Folli added.
The results would appear to make it difficult for any party to form a governing coalition strong enough to prevail for long, let alone to manage an economy with rising unemployment and a credit crunch, or push through structural changes to the ossified economy.
Italy remains a question mark,” said Nicolas Véron, an economist and a senior fellow at Bruegel, a Brussels-based research institute. Regardless of who ultimately controls the levers of government, he said, “The key question is whether we can have serious structural reform.”
“It was a work in progress before the elections,” Mr. Véron said, “and I think investors understand that it will remain a work in progress for some time.”
When he came to power in November 2011, after Mr. Berlusconi stepped down amid intense market turmoil, Mr. Monti was praised for restoring international confidence in Italy. Although he won plaudits from European leaders and President Obama, Italians remember him for raising the retirement age and taxes.
Taxes, taxes and more taxes, that’s what voters remember the most from Monti,” said Stefano Sacchi, a professor of political science at the University of Milan. “When he stopped being a technocrat and became a politician, he came under fire for the same issues Italians blame other politicians for.”
While Mr. Monti said repeatedly that if Italy managed to make its economy more competitive, taxes could eventually be lowered, his message was drowned out in the final days of a chaotic campaign by Mr. Grillo’s anti-austerity message, as well as by Mr. Berlusconi’s ploys.
The former prime minister told voters that he would reimburse them for an unpopular property tax and sent campaign literature in envelopes that read 2012 Tax Refund” in the same typeface used by Italy’s tax collection agency.
Although his limping party took far fewer votes than ever before, it was able to win in the powerful Lombardy region, after forming an alliance with the Northern League party. That will affect the Senate, where seats are partially assigned regionally. Thus Mr. Berlusconi managed to guarantee that his party, now in the opposition, would have significant veto power.
But the most startling result of the election was the success of the Five Star Movement, which triumphed after Mr. Grillo campaigned tirelessly while leading a powerful Web-based initiative that drew young people and first-time voters, as well as former supporters of Mr. Berlusconi, all united more by their anger at the current system than by any shared ideology.
The Five Star Movement drew votes that might have gone to the Democratic Party, especially after the Democrats’ leader, Pier Luigi Bersani, a former industry minister who grew up in the Communist Party, defeated Matteo Renzi, the charismatic 38-year-old mayor of Florence, in a party primary.
Davide Barillari, the Five Star Movement candidate for president of the Lazio Region, said in a television interview that the so-calledGrillini” would not ally with any coalition, but would vote according to their own views on individual laws. People want to send them all home,” he said of the current Parliament. “Old politics is over.”
Mr. Grillo, who has a conviction for manslaughter after a car accident in which three people died, cannot serve in Parliament under his self-imposed rule that no one with a conviction can be elected. Political analysts wondered how the likely 100 or more members of Parliament from the Five Star Movement, most of them first-time politicians, would vote.
“The risk is a block in policy activities, a Parliament incapable of making decisions, a stalemate,” Mr. Sacchi said.
Gaia Pianigiani contributed reporting from Rome and Nicola Clark from Paris.