The China Question

Time to Find a New Approach to Beijing

China's Silk Road Summit was a clear demonstration of the country's political and economic heft. But with three major historical anniversaries approaching for the country, it is time for the West to fundamentally rethink its relations with Beijing.

By Bernhard Zand

Photo Gallery: A Riddle in the Far East


"If you know the other and know yourself, you need not fear the result of a hundred battles."

Sun Tzu, "The Art of War"


China's emperors used to receive their guests and vassals in the Forbidden City or in their summer residences. But today, their successors only rarely do so. There are simply too many of them coming. So to host large receptions, Chinese President Xi Jinping has had a sumptuous conference center built on the outskirts of Beijing, amidst lush gardens and pavilions, not far from the Great Wall.

Last week, it was packed, as delegations from 150 countries showed up, including 37 heads of state and government, almost twice as many as attend the annual G-20 summit. They were there at Xi's invitation for the second Silk Road Summit, celebrating China's global infrastructure and development program, officially known as the Belt and Road Initiative.

At the first summit two years ago, only 29 presidents and prime ministers attended. This time, in addition to stalwart Chinese allies from Asia, Africa and the Middle East, several high-ranking European officials, including the heads of government of Italy and Austria, made their way to Beijing. Germany sent Economics Minister Peter Altmaier.

But not all of the world's leading countries made an appearance: The U.S. decided to turn down the invitation, as did India, which had also skipped the first event.

The guest list of the Silk Road Summit is the diplomatic response to a number of far-reaching questions: How should the world deal with China? How closely should it cooperate with China? To what extent can it trust Beijing?

None Can Ignore It

China has achieved economic, political and technological greatness the magnitude of which the world has not seen since the rise of the United States. The question of how to deal with China is more important for some countries than for others, but none can ignore it.

With every new achievement reached and every human rights violation committed by Beijing, this question becomes increasingly difficult to answer. To say that China is complicated and contradictory is a platitude. It is the dimensions of its contradictions that distinguish China from other difficult countries.

China's achievements since the beginning of its reform and opening policy have astonished observers in industrialized and emerging countries alike. The country has undergone a degree of economic and social transformation that nobody thought possible 40 years ago while the prosperity and number of jobs created by its booming economy exceed any historical comparison. China's technological advances have debunked the popular notion that innovation only thrives in pluralistic societies.

But this progress has been accompanied by a level of repression and control which, in its digital dimension, eclipses even the situation in North Korea. China's leadership is subjecting the Uighur Muslim minority to a security regime that is reminiscent of what the world saw in the 1930s, according to a senior U.S. State Department official. There is concern that Beijing will expand the digital surveillance systems that it now uses to suppress the Uighur population in the Xinjiang region to other parts of the country -- and perhaps even export them one day.

The contradictions of modern China are so extreme that they prompt extreme reactions, ranging from uncritical admiration, particularly in business circles, to flat-out rejection of the "Chinese model," especially among human rights activists.

Beijing's juggernaut development drive represents both a political and intellectual challenge. It is difficult to form a consistent opinion of a country whose size, population and complexity are comparable more to a continent than to a Western nation-state. Do the conditions inherent to China's transformation justify the methods employed by its government? Do these methods devalue what the Chinese have achieved over the past 40 years? What concrete conclusions can be drawn?

There can be no conclusive answers to such questions because modern China remains a work in progress. Although the political leadership is endeavoring to convey the impression of dynastic stability and has declared Xi as head of state for life, the country is still undergoing massive changes. This year marks the anniversary of three events that have shaped the contradictions, image and self-image of today's China.

I. Exactly 100 years ago, on May 4, 1919, 3,000 students set off in Beijing to protest the decision by the victorious Allies of World War I not to return the region surrounding Jiaozhou Bay to China, a region which had been lost by the German colonial power, leaving it instead to China's regional rival, Japan. The Communist Party -- along with other political movements that would come to shape Chinese history -- traces its roots back to this "May Fourth Movement," making it a key date in the emergence of modern China.

Outside China, little is known about the significance of this event, and this ignorance is symptomatic of the imbalance in the relationship of many countries to Beijing. "China knows us. But we don't know China," German sinologist Marina Rudyak recently wrote in an essay for the Center for Liberal Modernity, a Berlin-based think tank. This lack of knowledge often leads to simplistic and ahistorical debates in the West about topics like China's global quest for power and the Silk Road Initiative.

Yes, the Communist Party has shamelessly rewritten Chinese contemporary history and manipulated it for its own benefit. But even beyond the propaganda, many Chinese have their own view of history, and this changes their perception of China's current trade conflicts and their understanding of globalization.

Beijing capitalizes on all of the advantages of its huge economy, subsidizes entire industrial sectors and exerts economic pressure on other countries, while limiting access to its own markets.

A long Memory

Many Chinese are surprised that Europeans find this objectionable. When the West laid down the rules of global trade, Europe's great powers didn't bother with subsidies or market restrictions. They sent warships up the Pearl River and the Yangtze, muscling their way into Chinese ports and establishing colonies, which they called "concessions," such as the region surrounding Jiaozhou Bay.

"The Chinese want to beat us because there's a long historical memory," one of Germany's leading business experts on China, BASF CEO Martin Brudermüller, recently said, adding that this explains "the drive and ambition of the Chinese." It is a worldview that one must be familiar with when it comes to dealing with the country.

Not only does China have a different view of history and more far-reaching memories of globalization than most Europeans, but on Chinese world maps America lies far to the east, while Europe often appears as a small peninsula to the northwest of Russia. The Pacific, the subcontinent and Africa appear much larger.

History, geography and globalization: measured against the problems of dealing with China, these terms could seem abstract, but they're not. They remind us just how little we in the West know about China. Europe -- especially countries like Germany that have close economic ties with Beijing - must significantly expand its China knowledge.

The Berlin-based Mercator Institute for China Studies remains one of the few think tanks in the world that specializes in China, but there are still far too few China experts in Europe. European media, including DER SPIEGEL, are not nearly as strongly represented in China as in America -- and are far behind the American media presence in China as well.

A desire to better understand China does not mean adopting a Chinese view of the world. On the contrary, it sharpens our perspective on the opportunities and risks of China's ascent and is a precondition for making difficult decisions.

II. It was 70 years ago that Mao Zedong proclaimed the People's Republic of China, with the Communist Party planning to celebrate the event on October 1 with a military parade. President Xi is to drive past the troops dressed in a modern stylized Mao suit and salute them with the words "Tongzhimen hao!" -- "Greetings, comrades!"

It will be a masquerade. Although the Communist Party today has about 90 million members and permeates all areas of public life, Xi's China is in many ways the exact opposite of Mao's China. Mao was a utopian who tried to keep his country in a state of permanent revolution. Xi Jinping is a bureaucrat of power who strives for order and stability, no matter what the cost.

Mao's one-and-a-half-ton portrait still hangs at Tiananmen Gate, but the party has transformed from an ideological movement into an instrument of power and a career vehicle. Millions of party members are currently collecting points on a propaganda app that quizzes them on their knowledge of Xi Jinping speeches -- although they take great pains not to exceed the score of the leader of their party cell. Those who take Marxism seriously are seen as troublemakers. When a group of leftist students campaigned for the formation of an independent union in a welding machine factory last summer, the police raided their homes and arrested around 50 of them.

But there is one thing that connects Mao's and Xi's vision of China: the global aspirations and the determination to change the world. As British sinologist Julia Lovell writes in a recent monograph, Maoism spread like a fever around the globe, as an intellectual fashion in many Western countries and as a murderous ideology that inspired militant movements in developing countries from Cambodia to Colombia.

A More Pugnacious Approach

China's current global vision is no fever, but rather ambition, poured in concrete. From airstrips on Pacific islands to dams on the Mekong River and the quay walls of ports on the Mediterranean, the New Silk Road -- Xi's multi-billion-dollar development program -- is designed to cement China's geopolitical objectives.

It was the U.S. that first realized that China was rocking the foundations of the established world order. Under President Barack Obama, Washington opted for a strategic "Pivot to Asia," while the Trump administration has opted for a more pugnacious approach, labeling China a "strategic competitor" and a "revisionist" power that is using cheap loans and political power to bring one country after the other under its influence. This spring, the European Union followed suit. Using almost the same words, the European Commission wrote in a strategy paper that China is "a systemic rival promoting alternative models of governance" and "an economic competitor in the pursuit of technological leadership."

It remains to be seen whether such declarations of rivalry will impress Beijing. Prime Minister Li Keqiang was reportedly surprised by the skepticism that he encountered on his last trip to Brussels. Sending a clear message to China is to be welcomed, even if the EU strategy paper will most likely initially contribute more to Europe's internal cohesion than to any change of course by China.

Of far greater importance, though, are concrete steps, such as French President Emmanuel Macron's decision to invite German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker to join him in talks with Xi during a state visit to Paris -- an impressive new development in the history of European diplomacy. The countries of the European Union will never be able to act together on foreign policy with the same degree of unity as the United States. But EU member states must rigorously coordinate their diplomatic approach to China on diverse issues, ranging from their stance on the controversial network supplier Huawei, to human rights issues and geopolitical conflicts, like the one brewing in the South China Sea.

The projects that Europe initiates to counter China's economic power -- in Europe and on its periphery -- must also be concrete. The U.S. has reacted to the Silk Road Initiative by launching a $60 billion fund to fully resume the tedious business of pursuing development cooperation in many countries around the world. Who is going to step in and do this in the emerging economies of North Africa and the Middle East? Who is willing to support energy and infrastructure projects from the Balkans to Morocco? If the conditions are fair and the bidding process is transparent, there is no reason why we shouldn't cooperate with China in those regions. But this is primarily a task for Europe as it struggles to cope with a constant influx of refugees.

III. It was 30 years ago, on June 4, 1989, that tanks rolled across Beijing's Tiananmen Square. The reformer Deng Xiaoping, who had launched China's economic miracle, crushed the largest democracy movement that the country had seen since 1919 and hundreds of people were killed, both students and soldiers. The exact number of fatalities remains unknown.

In early June of this year, no one in China will hear or read a critical word in the censored media about this traumatic event. The student leaders of 1989 are in exile, civil rights activists will be sent out of the big cities to the countryside weeks ahead of the anniversary, and the state has the press and the internet firmly under its control.

These are the "alternative models of governance" that the EU rightly condemns in its strategy paper. China has established a surveillance and security regime that is unrivaled anywhere else in the world.

The full extent of this sophisticated control apparatus has become apparent over the past two years in the Xinjiang Autonomous Region, where state security forces are monitoring and suppressing the predominantly Muslim minority Uighurs, who number roughly 11 million. Beijing justifies its crackdown by pointing to a spate of riots and attacks involving militant Uighurs and compares its actions with measures taken by Western countries to combat terrorism after the Sept. 11, 2001 attacks.

But even some Chinese who support the goals of this policy are repulsed by how the state is pursuing it. All Muslim inhabitants of Xinjiang are intensively policed, both conventionally and with cutting-edge digital technology, by cameras that film every alley and every taxi, by "WiFi sniffers" that can harvest the data of their mobile phones at checkpoints, and by neighbors who are encouraged to denounce them. Anyone who acts suspiciously can be arrested. According to estimates by Adrian Zenz, a German researcher who has been focusing on Xinjiang, roughly one million people have been detained in prisons and internment camps, euphemistically called "re-education centers."

The government collects the personal data of all residents, including their DNA profiles. A new facial recognition software now even allows Uighurs to be identified by their biometric features. China is already applying similar technologies, which are not yet quite so advanced, in provinces outside Xinjiang. As the New York Times has reported, Chinese companies are also exporting such systems abroad, especially to authoritarian regimes, but also to Western countries.

Historic Obligation

Beijing's crackdown in Xinjiang is forcing Western governments to rethink their relationship with China. Only addressing human rights issues behind closed doors during state visits is no longer an option. EU countries like Germany, which are painfully familiar with the consequences of totalitarianism, have a historic obligation to bring their full weight to bear on this issue.

This does not invalidate the arguments put forward over the years by so-called China realists like former U.S. Secretary of State Henry Kissinger and former German Chancellor Helmut Schmidt. When Kissinger travelled to China in the early 1970s on behalf of then-President Richard Nixon, the country was still in the throes of the Cultural Revolution, in which unspeakable crimes were committed. No one would deny that it was nevertheless right to establish relations with Beijing at that time -- just as it was right for President Bill Clinton to reach out to China five years after the Tiananmen massacre.

But 20th century political pragmatists had no way of knowing what technological progress would do for 21st century autocracies. The use of these digital tools of human control must be contained by negotiations, just as international treaties have curbed the spread of nuclear weapons. A foreign policy based on universal values must be prepared to bear the anticipated political costs of pursuing this type of policy.

In the U.S., 24 senators and 19 representatives from both sides of the aisle have urged the Trump administration to challenge Beijing on the Uighur question and impose sanctions under the Global Magnitsky Act against top-ranking Chinese officials in the Xinjiang Autonomous Region. The Magnitsky Act is the U.S. government's most potent weapon in dealing with foreign politicians implicated in humans rights abuses and allows it, among other things, to freeze the accounts of those affected and prohibit them from entering the country.

So far, the EU has no comparable diplomatic remedy at its disposal, but in March, the European Parliament voted to change that. The European Commission will hopefully approve the resolution, especially in view of recent developments in China.

Even more effective would be a broad initiative - one which includes the U.S. -- to establish global standards for the use of digital mass surveillance technology, similar to the push that led to the international disarmament negotiations in the 1960s and the Commission on Security and Cooperation in Europe (CSCE) process in the 1970s. As a digital power, the EU may pale in comparison to the U.S. and China today, but its data protection regulations are exemplary worldwide. In the interests of its citizens, Europe should work to ensure that these standards are not set by China in the future.

Time for a True Global Currency

The International Monetary Fund’s global reserve asset, the Special Drawing Right, is one of the most underused instruments of multilateral cooperation. Turning it into a true global currency would yield several benefits for the global economy and the international monetary system.

José Antonio Ocampo

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NEW YORK – This year, the world commemorates the anniversaries of two key events in the development of the global monetary system. The first is the creation of the International Monetary Fund at the Bretton Woods conference 75 years ago. The second is the advent, 50 years ago, of the Special Drawing Right (SDR), the IMF’s global reserve asset.

When it introduced the SDR, the Fund hoped to make it “the principal reserve asset in the international monetary system.” This remains an unfulfilled ambition; indeed, the SDR is one of the most underused instruments of international cooperation. Nonetheless, better late than never: turning the SDR into a true global currency would yield several benefits for the world’s economy and monetary system.

The idea of a global currency is not new. Prior to the Bretton Woods negotiations, John Maynard Keynes suggested the “bancor” as the unit of account of his proposed International Clearing Union. In the 1960s, under the leadership of the Belgian-American economist Robert Triffin, other proposals emerged to address the growing problems created by the dual dollar-gold system that had been established at Bretton Woods. The system finally collapsed in 1971. As a result of those discussions, the IMF approved the SDR in 1967, and included it in its Articles of Agreement two years later.

Although the IMF’s issuance of SDRs resembles the creation of national money by central banks, the SDR fulfills only some of the functions of money. True, SDRs are a reserve asset, and thus a store of value. They are also the IMF’s unit of account. But only central banks – mainly in developing countries, though also in developed economies – and a few international institutions use SDRs as a means of exchange to pay each other.

The SDR has a number of basic advantages, not least that the IMF can use it as an instrument of international monetary policy in a global economic crisis. In 2009, for example, the IMF issued $250 billion in SDRs to help combat the downturn, following a proposal by the G20.

Most importantly, SDRs could also become the basic instrument to finance IMF programs. Until now, the Fund has relied mainly on quota (capital) increases and borrowing from member countries. But quotas have tended to lag behind global economic growth; the last increase was approved in 2010, but the US Congress agreed to it only in 2015. And loans from member countries, the IMF’s main source of new funds (particularly during crises), are not true multilateral instruments.

The best alternative would be to turn the IMF into an institution fully financed and managed in its own global currency – a proposal made several decades ago by Jacques Polak, then the Fund’s leading economist. One simple option would be to consider the SDRs that countries hold but have not used as “deposits” at the IMF, which the Fund can use to finance its lending to countries. This would require a change in the Articles of Agreement, because SDRs currently are not held in regular IMF accounts.

The Fund could then issue SDRs regularly or, better still, during crises, as in 2009. In the long term, the amount issued must be related to the demand for foreign-exchange reserves. Various economists and the IMF itself have estimated that the Fund could issue $200-300 billion in SDRs per year. Moreover, this would spread the financial benefits (seigniorage) of issuing the global currency across all countries. At present, these benefits accrue only to issuers of national or regional currencies that are used internationally – particularly the US dollar and the euro.

More active use of SDRs would also make the international monetary system more independent of US monetary policy. One of the major problems of the global monetary system is that the policy objectives of the US, as the issuer of the world’s main reserve currency, are not always consistent with overall stability in the system.

In any case, different national and regional currencies could continue to circulate alongside growing SDR reserves. And a new IMF “substitution account” would allow central banks to exchange their reserves for SDRs, as the US first proposed back in the 1970s.

SDRs could also potentially be used in private transactions and to denominate national bonds. But, as the IMF pointed out in its report to the Board in 2018, these “market SDRs,” which would turn the unit into fully-fledged money, are not essential for the reforms proposed here. Nor would SDRs need to be used as a unit of account outside the Fund.

The anniversaries of the IMF and the SDR in 2019 are causes for celebration. But they also represent an ideal opportunity to transform the SDR into a true global currency that would strengthen the international monetary system. Policymakers should seize it.


José Antonio Ocampo is a board member of Banco de la República, Colombia's central bank, professor at Columbia University, Chair of the UN Economic and Social Council’s Committee for Development Policy, and Chair of the Independent Commission for the Reform of International Corporate Taxation. He was Minister of Finance of Colombia and United Nations Under-Secretary-General for Economic and Social Affairs. He is the co-author (with Luis Bértola) of The Economic Development of Latin America since Independence.

Goodbye EU, and goodbye the United Kingdom

The invented identity of ‘Britishness’ is unravelling as English nationalism takes hold

Philip Stephens



During the spring of 1975 the Wall Street Journal ran a powerful headline. “Goodbye Great Britain”, the American business newspaper declared. The UK was known as the sick man of Europe. Investors were taking flight in the face of its ruinous economic performance and endemic industrial strife. Greatness had made way for spiralling decline.

The prediction proved premature. Britain was bailed out by the International Monetary Fund and subsequently saved by North Sea oil and, some would say, by Margaret Thatcher’s economic revolution. In any event, a decade later Thatcher was dancing on the world stage with US president Ronald Reagan.

Britain faces another existential moment. The Brexit story was supposed to be about leaving the EU. It has turned into a runaway national crisis. The forces driving Brexit look set to sweep away much more than the institutional machinery, economic relationships and political ties created during decades of EU membership. Goodbye to Brussels is shaping up as the first act in a two-part drama. The second may well wave goodbye to the UK.

The other day I listened to Mervyn King say that the government should dispense with further talks with Brussels and opt for a no-deal Brexit, albeit after a six-month period of preparation. The costs, the former Bank of England governor said, would be manageable and temporary. Given Lord King’s complacency about the stability of financial markets before the 2008 crash, many will discount his economic judgment. What struck me, however, was his insistence that Brexit was really about identity and culture.

Though he sits on the opposite side of the European debate, the former Conservative chancellor Kenneth Clarke agrees. The impetus for Brexit, Mr Clarke says, comes from a resurgence of the rightwing English nationalist wing of his party. The project reflects a strain of Conservatism that has never come to terms with the loss of empire. 

Leaving the EU — Independence Day, the Brexiters call it — is rooted as much in nostalgia as in the populist revolt against elites and outsiders that has supplied the European debate with such visceral anger. Hence the Brexiters’ fantasy of a new “Global Britain” and the ubiquitous allusions to the second world war and Winston Churchill’s readiness to stand alone. The bluster conceals a cry of pain.

Brexit is an English rather than a British enterprise. More specifically, it belongs overwhelmingly to provincial England. With the exception of Birmingham, the nation’s great cities — London, Manchester, Liverpool and Newcastle among them — were on the side of Remain. They were outvoted by Leavers in smaller English cities and towns and in rural areas.
Scotland backed Remain by a large margin. Pace the Brexiters of the Democratic Unionist party, Northern Ireland voted for continued EU membership. Wales followed England out.

Scotland voted in 2014 to stay in the union of the UK. It is hard to imagine it would do the same in another referendum. Five years ago, unionism offered proud Scots two supplementary identities. They could be at once British and European. After Brexit it will be either/or. The 1707 union with England handed Scotland an international role as a partner in empire. Outside of the EU it will be cut off from the rest of Europe.

Theresa May’s government insists that powers returned from Brussels will be hoarded at Westminster rather than shared with the Edinburgh parliament and other devolved administrations. The prime minister wants sharply to reduce immigration. Scotland wants more newcomers to oil the wheels of the economy. Why would that nation, with a political culture steeped in social market centrism, shackle itself to the rule of English nationalists?

Nor can Northern Ireland’s place in the UK any longer be taken for granted. The DUP has made a great fuss about ensuring that a settlement with the EU27 does not differentiate between the province and the rest of the UK. But their hostility to the EU is a minority position in Northern Ireland itself. Nothing has done so much as Brexit to reopen the question of Irish unification.

Britishness is an invented identity. It is deliberately expansive, calculated during the 19th century to cast empire as a joint project of the four nations of the UK. More recently, as the empire came home, it has provided a welcoming mantle for immigrants from former imperial outposts. British citizens of overseas heritage overwhelmingly identify as, well, British. Allegiance to England is seen predominantly as the property of the nation’s white communities.

The Leave side understood this during the 2016 referendum. It made two promises: to spend more money on the National Health Service and to shut out an (entirely imagined) influx of migrants from Turkey. Better to spend money on the health service, the less than subtle message ran, than see hospitals overrun by foreigners. The distance between such sentiments and the overt racism of extremists such as the English Defence League is perilously short.

To watch Britain’s descent into chaos in recent times has been to see the threads of Britishness, woven over centuries, unravel. Identity politics has elbowed aside common purpose. The tears in the fabric run alongside borders and within them. It is hard to imagine how they can be repaired.


The Biggest Question Facing the Federal Reserve

By Matthew C. Klein




Is the Federal Reserve right to be sanguine about inflation?

The central bank’s preferred measure of consumer prices grew just 1.6% in the 12 months ended March 31, compared with 2.0% in 2018. When asked about this at the press conference following this past Wednesday’s policy meeting, Fed Chair Jerome Powell declared there are “good reasons to think that some or all of the unexpected decrease [in inflation] may wind up being transient.” Stocks fell and real interest rates rose in response.

The immediate fear is that Powell’s interpretation of the recent data will cause monetary policy to be too tight. That could hurt stocks and other risky assets. It was only last year that excessive faith in the economy’s underlying strength led to interest rate increases that hit consumer spending, manufacturing, and housing.

Things have improved since then, in part because the central bank reversed course after realizing it had overshot, but the unnecessary slowdown may be partly responsible for the weak inflation readings of the past few months. Both the Atlanta Fed’s estimate of median wage changes and Tuesday’s Employment Cost Index, published by the Bureau of Labor Statistics, suggest that pay growth has stopped accelerating.



The deeper concern is that the Fed may be backtracking on plans to change how it treats deviations from its inflation target, which would imply systematically tighter monetary policy and slower long-term growth.

The good news is that Powell may be right about inflation, in which case those fears would be unfounded. Some indicators suggest price increases are actually accelerating.

The Fed currently aims for consumer prices to rise by 2% each year. Keeping calm in the face of one-off events is a key part of its strategy. Whether the overall price index rises faster than 2% a year, perhaps because of a spike in oil prices, or slower than 2% a year, as it did after the introduction of unlimited mobile-data plans, the central bank tries to “look through” temporary misses and focus solely on getting inflation back to 2%. The theoretical justification is that the overshoots and undershoots are supposed to cancel each other out over time.

Since the financial crisis, however, almost all the “transient” events have been in the same direction: down. The result is that the Fed’s preferred price index has grown at a yearly average rate of just 1.5% since the start of 2010.

Fed officials fear this could undermine people’s expectations of future price increases. At some point, persistent bad luck may eventually start to look like a series of deliberate choices. There is some evidence this is already happening, with the average inflation forecast collected by the University of Michigan’s Survey of Consumers down about half a percentage point since the end of 2015 compared with its stable 1994-2014 average. In standard theory, that should eventually lead to a new, slower trend rate of inflation.

Besides raising real interest rates today, slower inflation could make it even more difficult for the central bank to boost the economy in a downturn. (Historically, the Fed has lowered real short-term interest rates at least five percentage points to fight recessions, which means it already lacks breathing room.) The danger is that longer recessions and sluggish recoveries will reinforce this process by progressively lowering trend inflation and hobbling the Fed even further.

One possible solution is to aim for average price increases of 2% each year over time. If inflation were too low in one year, the central bank would aim for inflation faster than 2% the following year. It is unlikely any central bank possesses the level of control necessary to fine-tune price changes so precisely, however. New York Fed President John Williams’ solution is to assume that inflation will slow during recessions, as it has tended to do historically. He therefore argues that inflation should run a bit faster than 2% whenever the economy is growing.

Some traders may interpret Powell’s apparent willingness to let inflation decelerate as a signal that the Fed is not moving in this direction. While that is possible, the simpler explanation is that the recent inflation data are misleading. Powell noted the Dallas Fed’s “trimmed mean” price index, which ignores price changes in the most volatile components, has been stable at 2%.

More fundamentally, the bulk of the recent slowdown can be attributed to categories in which price changes are difficult to measure. “Portfolio management and investment services” simply track the stock market, while “indirect securities commissions” are estimated rather than observed. Clothing, footwear, and jewelry are subject to the vagaries of fashion. Prescription drug prices are notoriously difficult to measure. New medicines for previously untreated ailments have no comparable prices, for example. The government claims drug prices have dropped in the past few months, but few Americans would likely agree with that assessment.

Spencer Hill, a senior economist at Goldman Sachs, recommends tracking inflation with an index based solely on goods and services with prices that are easy to measure, such as new motor vehicles, rent excluding utilities, restaurant meals, and household supplies such as soap and toilet paper. While this “well measured” price index grew just 1.3% a year between the start of 2012 and the middle of 2018, it has accelerated rapidly since then thanks to broad-based increases in the prices of appliances, furniture, household supplies, schooling, and veterinarian visits.



In the past, large moves in this price index have tended to coincide with changes in broader measures, such as the widely followed core index and the Dallas Fed’s trimmed mean. If that pattern holds, the conversation about inflation could change very quickly.

Beijing’s Bank Bailout Better Be Bold

To revive growth, China needs to take potentially painful steps to reform its interest-rate system

By Nathaniel Taplin


The International Monetary Fund in 2017 estimated that a severe downturn could punch a hole in Chinese banks’ balance sheets equal to about 2.5% of gross domestic product. Photo: SeongJoon Cho/Bloomberg News


The cash needed to patch the holes in Chinese banks’ balance sheets probably isn’t far from the half-trillion-dollar U.S. government bank bailout after the financial crisis. But that staggering sum alone may be only the beginning of the pain.

Beijing’s half-hearted fixes since China’s deep downturn in 2015 have helped stave off an immediate financial crisis, but they severely damaged the dynamic private companies that drive growth. What’s really needed is far harder: overhauling a dysfunctional interest-rate system that breeds inefficiency.

That risks large-scale layoffs or social unrest, but failure to act could derail China’s ambitions to become a tech powerhouse and would spill over into the world economy.



International requirements for systemically important banks mean big Chinese banks still need hundreds of billions of dollars of new capital by the mid-2020s

The International Monetary Fund, in its last assessment of China’s financial system in late 2017, estimated a severe downturn could punch a hole in banks’ balance sheets equal to about 2.5% of gross domestic product, or around two trillion yuan ($300 billion). The problem would be particularly acute at smaller lenders, the IMF noted.

At first glance, Chinese banks now look well capitalized. Higher profits since 2016 have helped put topline capital adequacy on par with U.S. lenders.

A look under the hood is less encouraging. Most improvement has been at large banks, not the smaller lenders the IMF flagged. Overall loss provisions are equal to only 69% of problem loans, up from 2016 but down from 80% in early 2014. In the IMF’s scenario, losses at small lenders force their common equity tier 1 capital ratio—a common measure of banks’ resiliency—to just 3%. Large U.S. lenders bottomed out around 5% in 2009, according to the Federal Reserve Bank of Boston.

China’s current slowdown isn’t nearly that bad. But avoiding a structural decline in future growth requires a more efficient, competitive banking system. That means letting borrowing costs rise for some lumbering state-owned companies that receive underpriced loans. And that, in turn, would almost certainly convert many such troubled loans into real defaults.

State-controlled industrial firms show only a 4% return on assets—less than average bank lending rates of 5.6%. Real interest-rate reform therefore not only requires a substantial slug of cash to bolster the banking system but also a sea change in an economic policy that has kept key state companies afloat.

Case in point: While Beijing has taken steps to shore up bank profitability by cracking down on competition from China’s notorious shadow-banking system, the main effect has been to further bolster the country’s comfortable large banks. Smaller ones that do most small enterprise lending that drives the economy have been hurt as they’ve lost a crucial source of funding and fee income.

Industrial & Commercial Bank of China ,the world’s largest bank by assets, saw first-half 2018 net interest income rise 20% according Factset. But the net interest income of small banks barely grew at all in 2017 and 2018, estimates Natixis. Small-business lending has slowed sharply.

To solve the problem, Chinese Premier Li Keqiang has told big banks to boost small-enterprise lending by 30% in 2019. This half-measure is unlikely to work without cutting off many state-owned enterprises, though, meaning more write-downs and capital destruction or tricks like shifting loans to small subsidiaries of big state-owned enterprises.

A more promising step is Beijing’s decision to permit perpetual bond issuance as a way to raise bank capital. In addition to Bank of China’s successful Jan. 22 issuance, at least four midsize lenders have announced such bonds totaling over 100 billion yuan. That is trifling, however, against the at least 1.7 trillion yuan of troubled Chinese bank loans for which no loss provisions have been made. International requirements for systemically important banks mean big Chinese banks still need hundreds of billions of dollars of new capital by the mid-2020s.

More aggressive measures are needed, like another big expansion of China’s gargantuan multi-trillion-yuan local government debt swap or a new, large-scale government-funded “bad bank.” That then needs to be followed by full liberalization of deposit rates to allow real competition for retail funds inside the banking system. This would force all banks to seek out higher-return lending opportunities.

How fast such measures materialize—and whether they even do at all—will be a key clue to China’s economic trajectory over the next several years. A timid response will mean ever-bleaker headlines about China’s slowdown.


The US, Iran and a New American Deployment

Iran’s influence has spread across the Middle East, and the U.S. is pushing back.

By George Friedman


The United States has announced that it is deploying a carrier battle group and a bomber group to the Middle East. The reason given is that U.S. intelligence has detected an Iranian threat against U.S. and allied assets in the region. The United States has stated that it does not want war with Iran but is prepared to defend its interests in the region. It’s not clear what threat the U.S. detected, but since this force will take some time to reach the area, we can assume that the threat is not perceived to be imminent. And we will assume that the type of threat the U.S. believes is posed by Iran can be countered by the type and amount of air power deployed. But as with all such deployments, there are military, psychological and political components that must be understood.
 

Fallout From the U.S. Drawdown
Since the Obama administration, Washington’s strategy has been to recognize that the United States’ massive interventions in the Middle East failed to achieve their political goals but imposed substantial costs on the U.S. military and unbalanced the U.S. global posture. They may have disrupted al-Qaida but did not create effective regimes that could themselves suppress jihadist groups. The deployments were neither achieving their goal nor supporting U.S. strategies. Washington understood that withdrawing U.S. forces from the region would have political consequences but concluded that the threat posed by these consequences was acceptable.

The drawdown in U.S. forces redefined regional dynamics. The underlying strategic issue in the region has been the relationship between the Arab world, surrounding non-Arab states like Israel, Turkey and Iran, and great powers, like the United Kingdom and the United States. With the U.S. drawdown, the latter became less significant, while the relationships among the Arab and regional non-Arab powers became critical. At the time, the greatest threat came from Iran. For Iran, the Arab world was a historic threat but one that presented an immediate opportunity.






 

The threat and opportunity coalesced in the rise of the Islamic State, which occurred in parallel with the slow drawdown of U.S. forces. Shiite-majority Iran saw the radical Islamic, Sunni and Arab force as a threat to its interests, and particularly to its historic interest in Iraq (of which the nearly decadelong war in the 1980s was just one manifestation). Tehran could not tolerate a jihadist government in Baghdad, so it intervened, organizing and leading the Iraqi army. Ironically, at that point, Iranian and American interests coincided; both simply wanted to break the Islamic State. Once IS was broken, the U.S. continued its drawdown in Iraq while Iran became an increasingly dominant political factor in an Arab country with a large Shiite population.

This created a much larger and historic opportunity for Iran. Iran’s strategy was to exploit the Arab world’s Sunni-Shiite divide, using its commonality with Shiites to challenge Sunni Arab powers – especially Saudi Arabia. In Lebanon, Iran had already established a powerful position through Hezbollah, a Shiite Arab force, and it saw another opportunity in Syria. While the Alawite regime of President Bashar Assad was secular, the Alawites are a Shiite sect with historical ties to Iran. During Syria’s civil war, Iran intensified its support of the Assad regime and aligned with the Russian intervention. Tehran and Moscow had a common interest in weakening U.S. power in the region and a shared strategy of using the U.S. drawdown to do so. Iran and Russia were historical antagonists, but both had an overriding interest to weaken the United States, psychologically if not in actual global power.
 
Pressure on Iran
Iran has therefore emerged as a major regional force. It is a dominant power in Iraq and Lebanon, a significant force in Syria and is deeply engaged in the war in Yemen. It is in the process of surrounding Saudi Arabia, a country with which it has fought wars going back to the 1960s; indeed, in many ways, the Saudi-Iranian enmity is the foundation of regional dynamics. In the past, as during Iraq’s invasion of Kuwait, U.S. strategy would be to use main force to block Iran. But the new American strategy has been careful to limit American exposure. Therefore, the U.S. now wants to rely on regional powers to act when it is in their interests to do so, rather than to take direct action itself.

The result has been the emergence of an Israeli-Saudi coalition that includes nations on the Persian Gulf’s western coast. This force is dangerous to Iran. Iran has power around Saudi Arabia, but it is what might be called thin power. With the exception of Lebanon, its power in other countries is neither deeply rooted nor indestructible; rather, it is spread dangerously wide and shallow. And the cooperation that has emerged between Israel and Arab, anti-Iran powers is substantial. In addition to the political power being exerted on Iran, it’s under pressure from the economic sanctions put in place by the United States putatively because of Iran’s nuclear program. In reality, the sanctions fit into the U.S. strategy of reducing military exposure while using diplomatic and economic means to exert pressure. Iran, whose economy had been getting weaker on its own, has been significantly affected by U.S. economic actions.

Iran’s expansion has come under significant pressure. The Israelis have been attacking Iranian positions in Syria, and Russia – ostensibly Iran’s ally but one that’s not eager to see a powerful Iran in the Caucasus – has not made any attempt to stop them. Pressure in Yemen has also placed Iran in a difficult position. Iran remains influential in Iraq, but everywhere else, its expansion has run into serious problems.

Still, Iran has countered where it can. Tehran has been supplying Hamas for some time, but the relationship between the Sunni and Shiite entities has been necessarily complex. (Though Hamas still managed a significant rocket attack on Israel this weekend.) One of Iran’s political options is to draw Israel into attacks on Gaza and Lebanon and portray itself as the only major power in the Muslim world challenging Israel while many others are effectively allied with Israel. The problem with that strategy is that it could also energize jihadists, and they are not Iran’s friends.

Therefore, Iran has to either fold some of its cards or somehow strike. The U.S. has warned that an attack against its allies is possible. The issue now for the U.S. is that, given Iran’s economic problems and the broad but weak hold it has in the region, the drawdown of U.S. forces makes it less risky for Iran to take action. At the same time, reinserting large numbers of ground forces is not something the U.S. wants to do.

Instead, we see the deployment of U.S. air power in the form of a carrier battle group and land-based powers. The U.S. is positioning itself so that, if Iran carries out some operation to stabilize its position, the U.S. can respond with airstrikes. The problem is that, in Syria and Lebanon, Israel is capable of managing air power, and strikes in Iraq will find few targets worthy of the force. What the United States has threatened, without making any explicit threats, is airstrikes on Iran itself if it carries out operations against U.S. allies. But the force the U.S. is deploying is not large enough for a sustained air campaign. So, the threat it’s making at this time is one of limited air action, with further action readily available.

The U.S. deployment is a test of two things. First, whether air power is a significant enough threat to force the Iranians to refrain from aggressive actions in the region. Second, whether it is enough to reverse the Iranian expansion. Iran is embroiled in domestic issues, and the Iranian public, rather than rallying to the flag, might see American airstrikes as yet another miscalculation by the Iranian government. I certainly don’t know which it will be, nor do I think the U.S. government knows. But I suspect that the Iranian government doesn’t know for sure either, and that might limit their risk-taking.

Behind all this is the fact that the U.S. intervention in the region ultimately failed to achieve its political goals and led to the drawdown of the U.S. main force, leaving only limited forces pursuing very limited ends. Without a global power imposing force, the region rearranged itself, as the U.S. had hoped it would, but the rearrangement put Iran in a powerful position, which the U.S. certainly didn’t want. Anticipating that Iran will try to strike against the new anti-Iran coalition, the U.S. is trying to reassert its power without redeploying ground forces. In the end, the Israelis, the Saudis and the (hitherto unmentioned) Turks have more at stake than the U.S. and therefore need to take the risks, either way.

We Give Up! Part 7: Now Even Republicans Want A Dovish Fed

Not so long ago, the major US political parties had very different views on monetary policy. Democrats, representing labor, wanted high government spending, low interest rates and generally easy money to create as many jobs as possible. Republicans, representing capital, wanted relatively small government, low debt and tight money to give entrepreneurs a predictable future in which to build new factories.

But that was then. Today, across pretty much the entire sitting Establishment, easy money has become the goal of monetary policy, and the Fed is being reshaped to institutionalize this bias.

Consider this amazing headline and the article that explains it:

A Trump dilemma: Finding a dovish GOP ally to serve on Fed
The skeptical response to President Donald Trump’s choice of Stephen Moore for the Federal Reserve has thrown a spotlight on the tough task Trump has set for himself: Finding a rare conservative ally who both favors cutting interest rates and is respected enough to win Senate confirmation. 
Frustrated by the Fed’s handling of rates under Jerome Powell — his own choice to be chairman — the president tapped two outspoken political boosters to fill a pair of vacancies on the Fed’s board. One, Herman Cain, withdrew from consideration last week amid renewed scrutiny of sexual harassment and infidelity allegations that first surfaced during his 2012 presidential campaign. The other, Moore, faces rising opposition on Capitol Hill both because of a slew of inflammatory commentaries he wrote and concerns that he isn’t qualified to serve on the world’s leading central bank. 
Together, Cain, a former pizza company executive, and Moore, an economics commentator, represent a brash effort by Trump to reshape the Fed to his liking. Now, with Cain out of the picture and Moore’s selection in trouble, Trump might end up having to leave two of the seven seats on the Fed’s board unfilled. 
Many economists, both liberal and conservative, have suggested that Moore was chosen mainly for his allegiance to Trump’s priorities. He had long identified as an inflation “hawk” who favored keeping rates high enough to fight inflation, even when the economy was weak. Now, he sounds much more like a “dove,” aligned with Trump’s demand for low rates even with the economy on solid footing. 
Trump has only a shallow pool to pick from. He is pushing for the Fed to lower short-term rates, and he attacked Powell, in particular, for having overseen a rate hike in December, the fourth of 2018. 
A few potential Fed nominees who might satisfy Trump’s hunt for a political conservative inclined to cut rates have emerged. One, David Beckworth, a research fellow at George Mason University, was a Treasury official in the George W. Bush administration and has seemed favorable toward rate cuts for years, Conti-Brown said.

This story has a lot of fascinating angles, including:

The current Fed, which has set short term interest rates at a level that would have been considered wildly, dangerously low in any other era, is being attacked by a Republican president for not cutting rates back to zero – at a time when growth is above 3% and official unemployment is below 4%.

Nothing like this has ever before happened.
US GDP dovish Fed


President Trump, in trying to pack the Fed with easy-money Republicans is bumping up against the GOP’s sound money history. Today there are very few well-respected conservative economists who would agree that ZIRP (or NIRP!) is a good thing. That would be a contradiction in terms since if “conservative monetary policy” means anything, it’s that inflation is both very bad and caused by too-easy money. Finding someone who believes that and is willing to cut rates from here obviously isn’t easy.

On the other hand, Fed governors have cushy, high prestige jobs and want to keep them, so just nominating people like Cain and Moore will have a powerful institutional effect at the Fed, producing easier money than would otherwise be likely. So Trump wins either way.

And that’s assuming the Republicans stay in power after 2020. If they’re replaced by Democrats, the next president will have no trouble finding economists from the Keynesian left who are happy to engineer negative interest rates, eliminate cash from the economy, start buying equities with newly-created dollars – or just eliminate the whole debt/interest rate/taxation model and replace it with Modern Monetary Theory.

Either way, it’s easy money all the way down.

The Fed’s Job Market Experiment

Absent inflation, the Federal Reserve will let the unemployment rate keep falling

By Justin Lahart


A job fair in Pittsburgh. Hiring was strong in April, with the Labor Department reporting that the economy added 263,000 jobs. Photo: Keith Srakocic/Associated Press


If it wasn’t apparent already, the April jobs report makes it plenty clear the Federal Reserve isn’t likely to cut rates anytime soon. But what would it take for the central bank to raise them?

Hiring was strong last month, with the Labor Department reporting that the economy added 263,000 jobs—more than the 190,000 economists expected. The unemployment rate, which is based on a separate survey, fell to 3.6%— its lowest level since 1969. But this came about because the share of the population participating in the labor force, and therefore included in the unemployment rate, slipped.

The implication is that, unless hiring slows sharply, the potential pool of workers employers can draw from won’t be able to grow fast enough to prevent the unemployment rate from falling further over the course of the year. And as employers compete for that shrinking pool of workers, wage growth ought to accelerate.



But, though wage growth has been increasing, so far it is hardly running hot. Average hourly earnings were up 3.2% in April from a year earlier, equal to March’s gain and short of the 3.3% economists expected.

Absent wages really picking up, Fed policy makers may decide they have little to worry about from the job market—particularly since they have signaled recently that they are focused on getting inflation higher, and that they would be comfortable with inflation for a time going through the 2% target they have set for it.

Moreover, even if wage growth does pick up, that doesn’t mean higher inflation will be a fait accompli. Companies would first have to raise prices in an attempt to pass their higher compensation costs on to consumers, which is no easy thing in a competitive marketplace. And then consumers would have to accept those higher prices.

Until then, the Fed may leave rates on hold even as the unemployment rate continues to decline and workers become increasingly scarce. It is hard to know what to expect when the unemployment rate gets driven down so low, but we may be on the way to finding out.

Venezuela

How to get rid of Nicolás Maduro

An attempt to depose the dictator appears to have failed. Try again



APRIL 30TH DAWNED promisingly in Venezuela. Juan Guaidó, acknowledged as the country’s interim president by many democracies and millions of Venezuelans, appeared outside an air-force base in Caracas flanked by national guardsmen to declare that the end of the dictatorship was imminent. By his side was a leader of the opposition, Leopoldo López, who had somehow been freed from house arrest. His presence, and that of the guards, suggested that Venezuela’s security forces were ready at last to withdraw their support for Nicolás Maduro, who has ruled his country catastrophically and brutally for the past six years.

Thus began two days of rumour, intrigue and violence (see article). As The Economist went to press the regime was still in charge and the generals were proclaiming their loyalty to it. Mr Maduro had appeared on television to declare that the “coup-mongering adventure” had failed. Yet this week’s events reveal that his hold on power is weaker than he claims. Mr Guaidó, the United States, which supports him, and the commanders of Venezuela’s security apparatus must work together to put an end to it.

That may well have been the plan. John Bolton, America’s national security adviser, said on April 30th that senior regime officials, including the defence minister and the commander of the presidential guard, had agreed to dump Mr Maduro and transfer power to Mr Guaidó. Mike Pompeo, America’s secretary of state, later insisted that Mr Maduro had been worried enough to have a plane waiting to spirit him to Havana but was dissuaded by his Russian allies.

How true these claims are and what went wrong is uncertain. A letter on social media attributed to the general in charge of Venezuela’s intelligence service, who has abruptly left his job, gave Mr Bolton’s assertion some support by saying that people close to Mr Maduro were negotiating behind his back. Some newspaper reports say that the plan was to remove him on May 2nd but that Mr Guaidó had acted early, perhaps because Mr Maduro had got wind of the plan. The plotters got cold feet.

The false start, if that’s what it was, shows the way ahead. Both Mr Guaidó and the administration of Donald Trump will need to induce the top brass to switch sides by making clear that there is a role for them in a democratic Venezuela. The army gave up power in 1958 and helped usher in civilian rule. Today’s opposition and soldiers could co-operate in a similar fashion. Although Mr Maduro and his closest associates need to go, Mr Guaidó should welcome less tainted leaders of the chavista regime into a transitional government, which would relieve the humanitarian crisis while preparing for free elections. That could yet take many months.

The Trump administration has lumped Venezuela in with Cuba and Nicaragua in a “troika of tyranny”. It seems as eager to dislodge Cuba’s 60-year-old communist regime as it is to get rid of Mr Maduro. To that end it recently intensified America’s embargo on the island, including by letting American citizens sue European and Canadian companies that do business using Cuban assets stolen after the revolution.

American disdain for Cuba’s regime is justified. Its hundreds of spies in Venezuela help keep Mr Maduro in power. But the swipes at Cuba will tighten this bond precisely when America should be trying to prise it apart. Lawsuits against European firms will frustrate concerted diplomatic action against Venezuela. In the cause of removing Mr Maduro, America should for the time being set its quarrel with Cuba to one side.

The crucial choice lies with Venezuela’s army commanders. Mr Maduro’s misrule offers them no future. It has crushed the economy, starved the people, strangled democracy and forced more than 3m Venezuelans into exile. The hardship is bound to worsen with new American oil sanctions this year. The generals must begin to act like patriots. They need to destroy the regime, before the regime destroys their country.

Winning the War on Poverty

The Canadians are doing it; we’re not.

By David Brooks


Apartments in Memphis. According to recently released data, Americans could learn from Canada a better way to address poverty.CreditCreditDamon Winter/The New York Times


Jesus said the poor will always be among us, but there are a lot of people in Canada testing that proposition.

According to recently released data, between 2015 and 2017, Canada reduced its official poverty rate by at least 20 percent. Roughly 825,000 Canadians were lifted out of poverty in those years, giving the country today its lowest poverty rate in history.

How did it do it?

The overall economy has been decent but not robust enough to explain these striking outcomes. Instead, one major factor is that Canadians have organized their communities differently. They adopted a specific methodology to fight poverty.

Before I describe this methodology, let’s pause to think about what it’s often like in American poor areas. Everything is fragmented. There are usually a bevy of public and private programs doing their own thing. In a town there may be four food pantries, which don’t really know one another well. The people working in these programs have their heads down, because it’s exhausting enough just to do their own work.

A common model is one-donor-funding-one-program. Different programs compete for funds. They justify their existence using randomized controlled experiments, in which researchers try to pinpoint one input that led to one positive output. The foundation heads, city officials and social entrepreneurs go to a bunch of conferences, but these conferences don’t have much to do with one another.

In other words, the Americans who talk about community don’t have a community of their own. Every day, they give away the power they could have if they did mutually reinforcing work together to change whole systems.

In Canada it’s not like that. About 15 years ago, a disparate group of Canadians realized that a problem as complex as poverty can be addressed only through a multisector comprehensive approach. They realized that poverty was not going to be reduced by some innovation — some cool, new program nobody thought of before. It was going to be addressed through better systems that were mutually supporting and able to enact change on a population level.

So they began building citywide and communitywide structures. They started 15 years ago with just six cities, but now they have 72 regional networks covering 344 towns.

They begin by gathering, say, 100 people from a single community. A quarter have lived with poverty; the rest are from business, nonprofits and government.

They spend a year learning about poverty in their area, talking with the community. They launch a different kind of conversation. First, they don’t want better poor; they want fewer poor. That is to say, their focus is not on how do we give poor people food so they don’t starve. It is how do we move people out of poverty. Second, they up their ambitions. How do we eradicate poverty altogether? Third, they broaden their vision. What does a vibrant community look like in which everybody’s basic needs are met.

After a year they come up with a town plan. Each town’s poverty is different. Each town’s assets are different. So each town’s plan is different.

The town plans feature a lot of collaborative activity. A food pantry might turn itself into a job training center by allowing the people who are fed do the actual work. The pantry might connect with local businesses that change their hiring practices so that high school degrees are not required. Businesses might pledge to raise their minimum wage.

The plans involve a lot of policy changes on the town and provincial levels — improved day care, redesigned transit systems, better work-force development systems.

By the time Canada’s national government swung into action, the whole country had a base of knowledge and experience. The people in the field had a wealth of connections and a sense of what needed to be done. The two biggest changes were efforts in city after city to raise the minimum wage and the expansion of a national child benefit, which can net a family up to nearly $6,500 a year per child. Canada essentially has guaranteed income for the young and the old.

The process of learning and planning and adapting never ends. The Tamarack Institute, which pioneered a lot of this work, serves as a learning community hub for all the different regional networks.

Paul Born, the head of the institute, emphasizes that the crucial thing these communitywide collective impact structures do is change attitudes. In the beginning it’s as if everybody is swimming in polluted water. People are sluggish, fearful, isolated, looking out only for themselves. But when people start working together across sectors around a common agenda, it’s like cleaning the water. Communities realize they can do more for the poor. The poor realize they can do more for themselves. New power has been created, a new sense of agency.

Born doesn’t think you can really do social change without a methodology, without creating communitywide collective impact structures. But in many American communities we’re mostly scattershot. That’s the problem with our distrust and polarization. We often don’t build structures across difference. Transformational change rarely gets done.


David Brooks has been a columnist with The Times since 2003. He is the author of “The Road to Character” and the forthcoming book, “The Second Mountain.”