There’s a deep reason that guarantees the insipid feel of most historical courses and textbooks used in schools at all levels. The problem is that the underlying savagery of history is never really faced but is always fudged over. The books and courses in schools of all levels tend to be “tangential” to any reality.
One of the underlying “motors” of all history is the land question in its two aspects:
Parallel processes took place everywhere including China, Russia, etc.
The truth of these historo-crimes at the root of all history is then avoided “forever.”
This makes all discussions of who got what and why, where and when escapist at best.
2. The Private Land Question
Countries like those in Central America were characterized by the fact that when the European empires such as Spain were removed from “ownership,” handfuls of elite families took al the best farmland and parlayed that into political power. Those the top coffee growers have dominated Central America for centuries and the landless and indigenous are in a permanent emergency. Questioning this distribution leads to mass murders such as under Guatemala’s Ríos Montt (died 2018) in the 1980s.
These two “land questions”—the national and the private—are at the core of all world history and this means that failure to put these truths on the table of educational analysis, leads to “let’s pretend” “denial detours.”
There is a fundamental historical dishonesty that governs the educational process and since “the truth will make you free,” it follows that “the untruth will make you unfree” (i.e., “captive mind” syndrome everywhere).
“The wealthy countries must begin providing public climate finance at the scale necessary to support not only adaptation but loss and damage as well, and they must do so in accordance with their responsibility and capacity to act.” This is the main message of a technical report titled “Can Climate Change-Fueled Loss and Damage Ever Be Fair?” launched on the eve of the UN Climate Change Conference (COP25) to be held in Madrid from 2 to 13 December.
The U.S. and the EU owe more than half the cost of repairing future damage says the report, authored by Civil Society Review, an independent group that produces figures on what a “fair share” among countries of the global effort to tackle climate change should look like.
“The poorer countries are bearing the overwhelming majority of the human and social costs of climate change. Consider only one tragic incident—the Cyclones Idai and Kenneth—which caused more than $3 billion in economic damages in Mozambique alone, roughly 20% of its GDP, with lasting implications, not to mention the loss of lives and livelihoods” argues the report. “Given ongoing and deepening climate impacts, to ensure justice and fairness, COP25 must as an urgent matter operationalize loss and damage financing via a facility designed to receive and disburse resources at scale to developing countries.”
The UN Framework Convention on Climate Change (UNFCCC) has defined loss and damage to include harms resulting from sudden-onset events (climate disasters, such as cyclones) as well as slow-onset processes (such as sea level rise). Loss and damage can occur in human systems (such as livelihoods) as well as natural systems (such as biodiversity).
Eight weeks after Hurricane Dorian—the most intense tropical cyclone to ever strike the Bahamas—Prime Minister of Barbados, Mia Amor Mottley, spoke at the United Nations Secretary General’s Climate Action Summit. She said: “For us, our best practice traditionally was to share the risk before disaster strikes, and just over a decade ago we established the Caribbean Catastrophic Risk Insurance Facility. But, the devastation of Hurricane Dorian marks a new chapter for us. Because, as the international community will find out, the CCRIF will not meet the needs of climate refugees or, indeed, will it be sufficient to meet the needs of rebuilding. No longer can we, therefore, consider this as an appropriate mechanism…There will be a growing crisis of affordability of insurance.”
An April 2019 report from ActionAid revealed the insurance and other market based mechanisms fail to meet human rights criteria for responding to loss and damage associated with climate change. The impact of extreme natural disasters is equivalent to an annual global USD$520 billion loss, and forces approximately 26 million people into poverty each year.
Michelle Bachelet, UN High Commissioner for Human Rights, recently warned that the climate crisis is the greatest ever threat to human rights. It threatens the rights to life, health, housing and a clean and safe environment. The UN Human Rights Council has recognized that climate change “poses an immediate and far reaching threat to people and communities around the world and has implications for the full enjoyment of human rights.” In the Paris Agreement, parties to the UN Framework Convention on Climate Change (UNFCCC) acknowledged that they should—when taking action to address climate change—respect, promote and consider their respective obligations with regard to human rights. This includes the right to health, the rights of indigenous peoples, local communities, migrants, children, persons with disabilities and people in vulnerable situations and the right to development, as well as gender equality, the empowerment of women and intergenerational equity. Tackling loss and damage will require a human-rights centered approach that promotes justice and equity.
Across and within countries, the highest per capita carbon emissions are attributable to the wealthiest people, this because individual emissions generally parallel disparities of income and wealth. While the world’s richest 10% cause 50% of emissions, they also claim 52% of the world’s wealth. The world’s poorest 50% contribute approximately 10% of global emissions and receive about 8% of global income. Wealth increases adaptive capacity. All this means that those most responsible for climate change are relatively insulated from its impacts.
Between 1850 and 2002, countries in the Global North emitted three times as many greenhouse gas (GHG) emissions as did the countries in the Global South, where approximately 85% of the global population resides. The average CO2 emissions (metric tons per capita) of citizens in countries most vulnerable to climate change impacts, for example, Mozambique (0.3), Malawi, (0.1), and Zimbabwe (0.9), pale in comparison to the average emissions of a person in the U.S. (15.5), Canada (15.3), Australia (15.8), or UK (6).
In the 1980s, oil companies like Exxon and Shell carried out internal assessments of the carbon dioxide released by fossil fuels, and forecast the planetary consequences of these emissions, including the inundation of entire low-lying countries, the disappearance of specific ecosystems or habitat destruction, destructive floods, the inundation of low-lying farmland, and widespread water stress.
Nevertheless, the same companies and countries have pursued high reliance on GHG emissions, often at the expense of communities where fossil fuels are found (where oil spills, pollution, land grabs, and displacement is widespread) and certainly at the expense of public understanding, even as climate change harms and risks increased. Chevron, Exxon, BP and Shell together are behind more than 10% of the world’s carbon emissions since 1966. They originated in the Global North and its governments continue to provide them with financial subsidies and tax breaks.
Responsibility for, and capacity to act on, mitigation, adaptation and loss and damage varies tremendously across nations and among classes. It must also be recognized that the Nationally Determined Contributions (climate action plans or NDCs) that have thus far been proposed by the world’s nations are not even close to being sufficient, putting us on track for approximately 4°C of warming. They are also altogether out of proportion to national capacity and responsibility, with the developing countries generally proposing to do their fair shares, and developed countries proposed far too little.
Unfortunately, as Kevin Anderson (Professor of Energy and Climate Change at the University of Manchester and a former Director of the Tyndall Centre for Climate Change Research) has said: “a 4°C future is incompatible with an organized global community, is likely to be beyond ‘adaptation,’ is devastating to the majority of ecosystems, and has a high probability of not being stable.”
Equity analysis
The report assess countries’ NDCs against the demands of a 1.5°C pathway using two ‘fair share’ benchmarks, as in the previous reports of the Civil Society Equity Review coalition. These ‘fair share’ benchmarks are grounded in the principle-based claims that countries should act in accordance with their responsibility for causing the climate problem and their capacity to help solve it. These principles are both well-established within the climate negotiations and built into both the UNFCCC and the Paris Agreement.
To be consistent with the UNFCCC’s equity principles—the wealthier countries must urgently and dramatically deepen their own emissions reduction efforts, contribute to mitigation, adaptation and addressing loss and damage initiatives in developing countries; and support additional sustainable actions outside their own borders that enable climate-compatible sustainable development in developing countries.
For example, consider the European Union, whose fair share of the global emission reduction effort in 2030 is roughly about 22% of the global total, or about 8 Gigatons of CO2 equivalent (GtCO2eq). Since its total emissions are less than 5 GtCO2eq, the EU would have to reduce its emissions by approximately 160% per cent below 1990 levels by 2030 if it were to meet its fair share entirely through domestic reductions. It is not physically possible to reduce emissions by more than 100% domestically. So, the only way in which the EU can meet its fair share is by funding mitigation, adaptation and loss and damage efforts in developing countries.
Today’s mitigation commitments are insufficient to prevent unmanageable climate change, and—coming on top of historic emissions—they are setting in motion devastating changes to our climate and natural environment. These impacts are already prevalent, even with our current global average surface temperature rise of about 1°C. Impacts include droughts, firestorms, shifting seasons, sea-level rise, salt-water intrusion, glacial retreat, the spread of vector borne diseases, and devastation from cyclones and other extreme weather events. Some of these impacts can be minimized through adaptation measures designed to increase resilience to inevitable impacts.
These measures include, for example, renewing mangroves to prevent erosion and reduce flooding caused by storms, regulating new construction so that buildings can withstand tomorrow’s severe weather, using scarce water resources efficiently, building flood defenses, and setting aside land corridors to help species migrate. It is also crucial with such solutions that forest dwelling and indigenous peoples be given enforceable land rights, for not only are such rights matters of basic justice, they are also pragmatic recognitions of the fact that indigenous peoples have successfully protected key ecosystems.
Tackling underlying social injustices and inequalities—including through technological and financial transfers, as well as though capacity building—would also contribute to increasing resilience. Other climate impacts, however, are unavoidable, unmanageable or unpredictable, leading to a huge degree of loss and damage. Experts estimate the financial damage also will reach at least USD$300-700 billion by 2030, but the loss of locally sustained livelihoods, relationships and connections to ancestral lands are incalculable.
Failure to reduce GHG emissions now—through energy efficiency, waste reduction, renewable energy generation, reduced consumption, sustainable agriculture and transport—will only deepen impacts in the future. Avoidable impacts require urgent adaptation measures. At the same time, unavoidable and unmanageable change impacts—such as loss of homes, livelihoods, crops, heat and water stress, displacement, and infrastructure damage—need adequate responses through well-resourced disaster response plans and social protection policies.
For loss and damage financing, developed countries have a considerable responsibility and capacity to pay for harms that are already occurring. Of course, many harms will be irreparable in financial terms. However, where monetary contributions can help restore the livelihoods or homes of individuals exposed to climate change impacts, they must be paid. Just as the EU’s fair share of the global mitigation effort is approximately 22% in 2030, it could be held accountable for that same share of the financial support for such incidents of loss and damage in that year.
The table below provides an illustrative quantification of this simple application of fair shares to loss and damage estimates, and how they change if we compute the contribution to global climate change from the start of the industrial revolution in 1850 or from 1950.
Table 1: Countries’ Share of Global Responsibility and Capacity in 2019, the time of Cyclones Idai and Kenneth, as illustrative application of a fair share approach to Loss and Damage funding requirements.
The advantage of setting out responsibility and capacity to act in such numerical terms is to drive equitable and robust action today. Responsible and capable countries must—of course—ensure that those most able to pay towards loss and damage repairs are called upon to do so through domestic legislation that ensures correlated progressive responsibility. However, it should also motivate mitigation action to ensure that harms are not deepened in the future.
In the Equity analysis used here, capacity—a nation’s financial ability to contribute to solving the climate problem—can be captured by a quantitative benchmark defined in a more or less progressive way, making the definition of national capacity dependent on national income distribution. This means a country’s capacity is calculated in a manner that can explicitly account for the income of the wealthy more strongly than that of the poor, and can exclude the incomes of the poorest altogether. Similarly, responsibility—a nation’s contribution to the planetary GHG burden—can be based on cumulative GHG emissions since a range of historical start years, and can consider the emissions arising from luxury consumption more strongly than emissions from the fulfillment of basic needs, and can altogether exclude the survival emissions of the poorest. Of course, the ‘right’ level of progressivity, like the ‘right’ start year, are matters for deliberation and debate.1
The report acknowledges “the difficulties in estimating financial loss and damage and the limited data we currently have,” but it recommends nevertheless “a minimal goal of providing at least USD$300 billion per year by 2030 of financing for loss and damage through the UNFCCC’s Warsaw International Mechanism for Loss and Damage (WIM).” Given that this corresponds to a conservative estimate of damage costs, the report further recommends “the formalization of a global obligation to revise this figure upward as observed and forecast damages increase.”
The new finance facility should provide “public climate financing and new and innovative sources of financing, in addition to budget contributions from rich countries, that can truly generate additional resources (such as air and maritime levies, Climate Damages Tax on oil, gas and coal extraction, a Financial Transaction Tax) at a progressive scale to reach at least USD$300 billion by 2030.” This means aiming for at least USD$150 billion by 2025 and ratcheting up commitments on an annual basis. Ambition targets should be revised based on the level of quantified and quantifiable harms experienced.
Further, developing countries who face climate emergencies should benefit from immediate debt relief–in the form of an interest-free moratorium on debt payments. This would open up resources currently earmarked for debt repayments to immediate emergency relief and reconstruction.
Finally, a financial architecture needs to be set up that ensures funding reaches the marginalized communities in developing countries, and that such communities have decision making say over reconstruction plans. Funds should reach communities in an efficient and effective manner, taking into account existing institutions as appropriate.
Currently, the Paris Rulebook allows countries to count non-grant instruments as climate finance, including commercial loans, equity, guarantees and insurance. Under these rules, the United States could give a USD$50 million commercial loan to Malawi for a climate mitigation project. This loan would have to be repaid at marketinterest rates—a net profit for the U.S.—so its grant-equivalence is $0. But under the Paris Rulebook, the U.S. could report the loan’s face value ($50 million) as climate finance. This is not acceptable. COP25 must ensure that the WIM has robust outcomes and sufficient authority to deliver a fair and ambitious outcome for the poorest and most vulnerable in relation to loss & damage.
Note
For more details, including how progressivity is calculated and a description of the standard data sets upon which those calculations are based, see the referenceproject page. For an interactive experience and a finer set of controls, see the Climate Equity Reference Calculator. (return to text)
The background of immigrants to China is becoming more diverse. While the number of high-earning expatriates from developed countries has peaked, China is now also attracting more students than ever from all over the world, including many from lesser developed countries. Low-skilled labor and migration for marriage are also on the rise. The main areas that attract foreigners are the large urban centers along the coast (Guangzhou, Shanghai, Beijing) and borderland regions in the South, Northeast and Northwest, but smaller numbers are also making their way to smaller cities across China.
According to their analysis, for many foreigners China has become considerably less accommodating over the last ten years, particularly with regard to border control, public security, visa categories, and work and residence permits. China’s immigration policy is still driven by narrow concerns of regulation, institutionalization and control. It remains predicated on attracting high-quality professionals, researchers, entrepreneurs and investors. Long-term challenges like the emerging demographic transition, remain to be addressed.
The authors detect a worrying trend towards intolerance to ethnic and racial difference, fed by increasing nationalism and ethnicchauvinism. They argue that the Chinese government, civil society, foreign diplomatic missions, employers of foreigners and international organizations present in China should take a clear stance against racism and discrimination. China’s immigration policy needs to include the integration of foreigners into society and provide clear and predictable paths to acquiring permanent residence.
(Speech by Governor Lael Brainard, at the Presentation of the 2019 William F. Butler Award New York Association for Business Economics, New York, New York)
It is a pleasure to be here with you. It is an honor to join the 45 outstanding economic researchers and practitioners who are past recipients of the William F. Butler Award. I want to express my deep appreciation to the New York Association for Business Economics (NYABE) and NYABE President Julia Coronado.
I will offer my preliminary views on the Federal Reserve’s review of its monetary policy strategy, tools, and communications after first touching briefly on the economic outlook. These remarks represent my own views. The framework review is ongoing and will extend into 2020, and no conclusions have been reached at this time.1
Outlook and Policy
There are good reasons to expect the economy to grow at a pace modestly above potential over the next year or so, supported by strong consumers and a healthy job market, despite persistent uncertainty about trade conflict and disappointing foreign growth. Recent data provide some reassurance that consumerspending continues to expand at a healthy pace despite some slowing in retail sales. Consumer sentiment remains solid, and the employment picture is positive. Housing seems to have turned a corner and is poised for growth following several weak quarters.
Employment remains strong. The employment-to-population ratio for prime-age adults has moved up to its pre-recession peak, and the three-month moving average of the unemployment rate is near a 50-year low.2 Monthly job gains remain above the pace needed to absorb new entrants into the labor force despite some slowing since last year. And initial claims for unemployment insurance—a useful real-time indicator historically—remain very low despite some modest increases.
Foreign growth remains subdued. While there are signs that the decline in euro-area manufacturing is stabilizing, the latest indicators on economic activity in China remain sluggish, and the news in Japan and in many emerging markets has been disappointing. Overall, it appears third-quarter foreign growth was weak, and the latest indicators point to little improvement in the fourth quarter.
More broadly, the balance of risks remains to the downside, although there has been some improvement in risk sentiment in recent weeks. The risk of a disorderly Brexit in the near future has declined significantly, and there is some hope that a U.S.–Chinatrade truce could avert additional tariffs. While risks remain, financial market indicators suggest market participants see a diminution in such risks, and probabilities of recessions from models using market data have declined.
The baseline is for continued moderate expansion, a strong labor market, and inflation moving gradually to our symmetric 2 percent objective. The Federal Open Market Committee (FOMC) has taken significant action to provide insurance against the risks associated with trade conflict and weak foreign growth against a backdrop of muted inflation. Since July, the Committee has lowered the target range for the federal funds rate by ¾ percentage point, to the current range of 1½ to 1¾ percent. It will take some time for the full effect of this accommodation to work its way through economic activity, the labor market, and inflation. I will be watching the data carefully for signs of a material change to the outlook that could prompt me to reassess the appropriate path of policy.
Review
The Federal Reserve is conducting a review of our monetary policy strategy, tools, and communications to make sure we are well positioned to advance our statutory goals of maximum employment and price stability.3 Three key features of today’s new normal call for a reassessment of our monetary policy strategy: the neutral rate is very low here and abroad, trend inflation is running below target, and the sensitivity of price inflation to resource utilization is very low.4
First, trend inflation is below target.5 Underlying trend inflation appears to be running a few tenths below the Committee’s symmetric 2 percent objective, according to various statistical filters. This raises the risk that households and businesses could come to expect inflation to run persistently below our target and change their behavior in a way that reinforces that expectation. Indeed, with inflation having fallen short of 2 percent for most of the past seven years, inflation expectations may have declined, as suggested by some survey-based measures of long-run inflation expectations and by market-based measures of inflation compensation.
Second, the sensitivity of price inflation to resource utilization is very low. This is what economists mean when they say that the Phillips curve is flat. A flat Phillips curve has the important advantage of allowing employment to continue expanding for longer without generating inflationary pressures, thereby providing greater opportunities to more people. But it also makes it harder to achieve our 2 percent inflation objective on a sustained basis when inflation expectations have drifted below 2 percent.
Third, the long-run neutral rate of interest is very low, which means that we are likely to see more frequent and prolonged episodes when the federal funds rate is stuck at its effective lower bound (ELB).6The neutral rate is the level of the federal funds rate that would keep the economy at full employment and 2 percent inflation if no tailwinds or headwinds were buffeting the economy. A variety of forces have likely contributed to a decline in the neutral rate, including demographic trends in many large economies, some slowing in the rate of productivity growth, and increases in the demand for safe assets. When looking at the Federal Reserve’s Summary of Economic Projections (SEP), it is striking that the Committee’s median projection of the longer-run federal funds rate has moved down from 4¼ percent to 2½ percent over the past seven years.7 A similar decline can be seen among private forecasts.8 This decline means the conventional policy buffer is likely to be only about half of the 4½ to 5 percentage points by which the FOMC has typically cut the federal funds rate to counter recessionary pressures over the past five decades.
This large loss of policy space will tend to increase the frequency or length of periods when the policy rate is pinned at the ELB, unemployment is elevated, and inflation is below target.9 In turn, the experience of frequent or extended periods of low inflation at the ELB risks eroding inflation expectations and further compressing the conventional policy space. The risk is a downward spiral where conventional policy space gets compressed even further, the ELB binds even more frequently, and it becomes increasingly difficult to move inflation expectations and inflation back up to target. While consumers and businesses might see very low inflation as having benefits at the individual level, at the aggregate level, inflation that is too low can make it very challenging for monetary policy to cut the short-term nominal interest rate sufficiently to cushion the economy effectively.10
The experience of Japan and of the euro area more recently suggests that this risk is real. Indeed, the fact that Japan and the euro area are struggling with this challenging triad further complicates our task, because there are important potential spillovers from monetary policy in other major economies to our own economy through exchange rate and yield curve channels.11
In light of the likelihood of more frequent episodes at the ELB, our monetary policy review should advance two goals. First, monetary policy should achieve average inflation outcomes of 2 percent over time to re-anchor inflation expectations at our target. Second, we need to expand policy space to buffer the economy from adverse developments at the ELB.
Achieving the Inflation Target
The apparent slippage in trend inflation below our target calls for some adjustments to our monetary policy strategy and communications. In this context and as part of our review, my colleagues and I have been discussing how to better anchor inflation expectations firmly at our objective. In particular, it may be helpful to specify that policy aims to achieve inflation outcomes that average 2 percent over time or over the cycle. Given the persistent shortfall of inflation from its target over recent years, this would imply supporting inflation a bit above 2 percent for some time to compensate for the period of underperformance.
One class of strategies that has been proposed to address this issue are formal “makeup” rules that seek to compensate for past inflation deviations from target. For instance, under price-level targeting, policy seeks to stabilize the price level around a constant growth path that is consistent with the inflation objective.12 Under average inflation targeting, policy seeks to return the average of inflation to the target over some specified period.13
To be successful, formal makeup strategies require that financial market participants, households, and businesses understand in advance and believe, to some degree, that policy will compensate for past misses. I suspect policymakers would find communications to be quite challenging with rigid forms of makeup strategies, because of what have been called time-inconsistency problems. For example, if inflation has been running well below—or above—target for a sustained period, when the time arrives to maintain inflation commensurately above—or below—2 percent for the same amount of time, economic conditions will typically be inconsistent with implementing the promised action. Analysis also suggests it could take many years with a formal average inflation targeting framework to return inflation to target following an ELB episode, although this depends on difficult-to-assess modeling assumptions and the particulars of the strategy.14
Thus, while formal average inflation targeting rules have some attractive properties in theory, they could be challenging to implement in practice. I prefer a more flexible approach that would anchor inflation expectations at 2 percent by achieving inflation outcomes that average 2 percent over time or over the cycle. For instance, following five years when the public has observed inflation outcomes in the range of 1½ to 2 percent, to avoid a decline in expectations, the Committee would target inflation outcomes in a range of, say, 2 to 2½ percent for the subsequent five years to achieve inflation outcomes of 2 percent on average overall. Flexible inflation averaging could bring some of the benefits of a formal average inflation targeting rule, but it would be simpler to communicate. By committing to achieve inflation outcomes that average 2 percent over time, the Committee would make clear in advance that it would accommodate rather than offset modest upward pressures to inflation in what could be described as a process of opportunistic reflation.15
Policy at the ELB
Second, the Committee is examining what monetary policy tools are likely to be effective in providing accommodation when the federal funds rate is at the ELB.16 In my view, the review should make clear that the Committee will actively employ its full toolkit so that the ELB is not an impediment to providing accommodation in the face of significant economic disruptions.
The importance and challenge of providing accommodation when the policy rate reaches the ELB should not be understated. In my own experience on the international response to the financial crisis, I was struck that the ELB proved to be a severe impediment to the provision of policy accommodation initially. Once conventional policy reached the ELB, the long delays necessitated for policymakers in nearly every jurisdiction to develop consensus and take action on unconventional policy sapped confidence, tightened financial conditions, and weakened recovery. Economic conditions in the euro area and elsewhere suffered for longer than necessary in part because of the lengthy process of building agreement to act decisively with a broader set of tools.
Despite delays and uncertainties, the balance of evidence suggests forward guidance and balance sheet policies were effective in easing financial conditions and providing accommodation following the global financial crisis.17 Accordingly, these tools should remain part of the Committee’s toolkit. However, the quantitative asset purchase policies that were used following the crisis proved to be lumpy both to initiate at the ELB and to calibrate over the course of the recovery. This lumpiness tends to create discontinuities in the provision of accommodation that can be costly. To the extent that the public is uncertain about the conditions that might trigger asset purchases and how long the purchases would be sustained, it undercuts the efficacy of the policy. Similarly, significant frictions associated with the normalization process can arise as the end of the asset purchase program approaches.
For these reasons, I have been interested in exploring approaches that expand the space for targeting interest rates in a more continuous fashion as an extension of our conventional policy space and in a way that reinforces forward guidance on the policy rate.18 In particular, there may be advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range of the maturity spectrum—yield curve caps—in tandem with forward guidance that conditions liftoff from the ELB on employment and inflation outcomes.
To be specific, once the policy rate declines to the ELB, this approach would smoothly move to capping interest rates on the short-to-medium segment of the yield curve. The yield curve ceilings would transmit additional accommodation through the longer rates that are relevant for households and businesses in a manner that is more continuous than quantitative asset purchases. Moreover, if the horizon on the interest rate caps is set so as to reinforce forward guidance on the policy rate, doing so would augment the credibility of the yield curve caps and thereby diminish concerns about an open-ended balance sheet commitment. In addition, once the targeted outcome is achieved, and the caps expire, any securities that were acquired under the program would roll off organically, unwinding the policy smoothly and predictably. This is important, as it could potentially avoid some of the tantrum dynamics that have led to premature steepening at the long end of the yield curve in several jurisdictions.
Forward guidance on the policy rate will also be important in providing accommodation at the ELB. As we saw in the United States at the end of 2015 and again toward the second half of 2016, there tends to be strong pressure to “normalize” or lift off from the ELB preemptively based on historical relationships between inflation and employment. A better alternative would have been to delay liftoff until we had achieved our targets. Indeed, recent research suggests that forward guidance that commits to delay the liftoff from the ELB until full employment and 2 percent inflation have been achieved on a sustained basis—say over the course of a year—could improve performance on our dual-mandate goals.19
To reinforce this commitment, the forward guidance on the policy rate could be implemented in tandem with yield curve caps. For example, as the federal funds rate approaches the ELB, the Committee could commit to refrain from lifting off the ELB until full employment and 2 percent inflation are sustained for a year. Based on its assessment of how long this is likely take, the Committee would then commit to capping rates out the yield curve for a period consistent with the expected horizon of the outcome-based forward guidance. If the outlook shifts materially, the Committee could reassess how long it will take to get inflation back to 2 percent and adjust policy accordingly. One benefit of this approach is that the forward guidance and the yield curve ceilings would reinforce each other.
The combination of a commitment to condition liftoff on the sustained achievement of our employment and inflation objectives with yield curve caps targeted at the same horizon has the potential to work well in many circumstances. For very severe recessions, such as the financial crisis, such an approach could be augmented with purchases of 10-year Treasury securities to provide further accommodation at the long end of the yield curve. Presumably, the requisite scale of such purchases—when combined with medium-term yield curve ceilings and forward guidance on the policy rate—would be relatively smaller than if the longer-term asset purchases were used alone.
Monetary Policy and Financial Stability
Before closing, it is important to recall another important lesson of the financial crisis: The stability of the financial system is important to the achievement of the statutory goals of full employment and 2 percent inflation. In that regard, the changes in the macroeconomic environment that underlie our monetary policy review may have some implications for financial stability. Historically, when the Phillips curve was steeper, inflation tended to rise as the economy heated up, which prompted the Federal Reserve to raise interest rates. In turn, the interest rate increases would have the effect of tightening financial conditions more broadly. With a flat Phillips curve, inflation does not rise as much as resource utilization tightens, and interest rates are less likely to rise to restrictive levels. The resulting lower-for-longer interest rates, along with sustained high rates of resource utilization, are conducive to increasing risk appetite, which could prompt reach-for-yield behavior and incentives to take on additional debt, leading to financial imbalances as an expansion extends.
To the extent that the combination of a low neutral rate, a flat Phillips curve, and low underlying inflation may lead financial stability risks to become more tightly linked to the business cycle, it would be preferable to use tools other than tightening monetary policy to temper the financial cycle. In particular, active use of macroprudential tools such as the countercyclical buffer is vital to enable monetary policy to stay focused on achieving maximum employment and average inflation of 2 percent on a sustained basis.
Conclusion
The Federal Reserve’s commitment to adapt our monetary policy strategy to changing circumstances has enabled us to support the U.S. economy throughout the expansion, which is now in its 11th year. In light of the decline in the neutral rate, low trend inflation, and low sensitivity of inflation to slack as well as the consequent greater frequency of the policy rate being at the effective lower bound, this is an important time to review our monetary policy strategy, tools, and communications in order to improve the achievement of our statutory goals. I have offered some preliminary thoughts on how we could bolster inflation expectations by achieving inflation outcomes of 2 percent on average over time and, when policy is constrained by the ELB, how we could combine forward guidance on the policy rate with caps on the short-to-medium segment of the yield curve to buffer the economy against adverse developments.
For example, the Blue Chip Consensus long-run projection for the three-month Treasury bill has declined from 3.6 percent in October 2012 to 2.4 percent in October 2019. See Wolters Kluwer (2019), Blue Chip Economic Indicators, vol. 44 (October 10); and Wolters Kluwer (2012), Blue Chip Economic Indicators, vol. 37 (October 10). (return to text)
The important observation that some consumers and businesses see low inflation as having benefits emerged from listening to a diverse range of perspectives, including representatives of consumer, labor, business, community, and other groups during the Fed Listens events; for details, see this page. (return to text)
For details on purchases of securities by the Federal Reserve, see this page. For a discussion of forward guidance, see this page. See, for example, Simon Gilchrist and Egon Zakrajšek (2013), “The Impact of the Federal Reserve’s Large-Scale Asset Purchase Programs on Corporate Credit Risk,” Journal of Money, Credit and Banking, vol. 45, (s2, December), pp. 29–57; Simon Gilchrist, David López-Salido, and Egon Zakrajšek (2015), “Monetary Policy and Real Borrowing Costs at the Zero Lower Bound,” American Economic Journal: Macroeconomics, vol. 7 (January), pp. 77–109; Jing Cynthia Wu and Fan Dora Xia (2016), “Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound,” Journal of Money, Credit and Banking, vol. 48 (March–April), pp. 253–91; and Stefania D’Amico and Iryna Kaminska (2019), “Credit Easing versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs” [archived PDF], Bank of England Staff Working Paper Series 825 (London: Bank of England, September). (return to text)
Simone McGuinness spoke with Suzanne Scoggins, a fellow with the National Asia Research Program (NARP), about the reports of rising police–society conflict in China. Dr. Scoggins discusses how the Chinese Communist Party has responded to the upsurge, what channels Chinese citizens are utilizing to express their concerns, and what the implications are for the rest of the world.
What is the current state of police-society relations in China?
Reports of policeviolence have been on the rise, although this does not necessarily mean that violence is increasing. It does, however, mean that the media is more willing to report violence and that more incidents of violence are appearing on social media.
What we can now study is the nature of that violence—some are big events such as riots or attacks against the police, but there are also smaller events. For example, we see reports of passengers on trains who get into arguments with transit police. They may fight because one of the passengers is not in the right seat or is carrying something prohibited. Rather than complying with the officer, the passenger ends up getting into some sort of violent altercation. This kind of violence is typically being captured by cellphone cameras, and sometimes it makes the news.
The nature of the conflict matters. If somebody is on a train and sitting in a seat that they did not pay for, then it is usually obvious to the people reading about or watching the incident that the civilian is at fault. But if it is chengguan (城管, “city administration”) telling an elderly woman to stop selling her food on the street and the chengguan becomes violent, then public perceptions may be very different. It is that second type of violence that can be threatening to the state. The public’s response to the type of conflict can vary considerably.
What are the implications for China as a whole?
Regarding what this means for China, it’s not good for the regime to sustain this kind of conflict between street-level officers or state agents and the public. It lowers people’s trust in the agents of the government, and people may assume that the police cannot enforce public security. There are many state agents who might be involved in a conflict, such as the chengguan, the xiejing (auxiliary officer), or the official police. The type of agent almost doesn’t matter because the uniforms often look similar.
When information goes up online of state agents behaving poorly, it makes the state a little more vulnerable. Even people who were not at the event might see it on social media or in the news and think, “Oh, this is happening in my community, or in my province, or across the nation.” This violates public expectations about how the police or other state agents should act. People should be able to trust the police and go to them when they have problems.
How has the Chinese government responded to the increase in reporting violence?
There is a twofold approach. The first is through censorship. When negative videos go up online or when the media reports an incident, the government will go in and take it down. We see this over time. Even while collecting my research, some of the videos that were initially available online are no longer accessible simply because they have been censored. The government is removing many different types of content, not only violence. Censors are also interested in removing any sort of misinformation that might spread on social media.
If step one is to take the video or report down, step two is to counteract any negative opinion by using policepropaganda. This is also referred to as “public relations,” and the goal is to present a better image of the police. Recently, the Ministry of Public Security put a lot of money and resources into their social media presence. Many police stations have a social media account on WeChat or Weibo (微博, “microblogging”) and aim to present a more positive, friendly image of the police. The ministry also teamed up with CCTV to produce television content. This has been going on for some time, but recently shows have become more sophisticated.
There is one program, for example, called Police Training Camp. It is a reality show where police officers are challenged with various tasks, and the production is very glossy. The ministry also produces other sorts of specials featuring police who are out in the field helping people. It shows the police officers working really long shifts, interacting positively with the public, and really making a difference in people’s lives. In this way, the government is counteracting negative opinions about policeviolence or misconduct.
Do you know of any effective avenues that Chinese people have to address their concerns? Which avenues are becoming more popular?
This is a direct channel to the Ministry of Public Security, and all these calls are reviewed. There is not a whole lot that citizens can do about specific corruption claims. But if somebody has a particular goal, then the hotline is slightly more effective because it allows citizens to alert the ministry. However, many people do not know about the hotline, so the ministry is trying to increase awareness and also help staff the call center so that it can more effectively field calls.
As for how much relief people feel when they use these channels, this depends on what their goal is. If the goal is to get somebody fired, then the hotline may not work. But if someone is looking to air their grievances, then it may be helpful.
What are the implications of increased police-society conflict in China for the rest of the world? What can the United States or other countries do to improve the situation?
These are really sticky issues that are difficult to solve. When discussing police–society conflict, it is important to step back and think about who the police are—the enforcement agents of the state. So by their very nature, there will be conflict between police and society, and that is true in every country. In China, it really depends on where and what type of police climate we are talking about.
Xinjiang, for instance, has a very different police climate than other regions in China. There is a different type of policing and police presence. Chinese leaders certainly do not want any international intervention in Xinjiang. They see this as an internal issue. While some governments in Europe and the United States might want to intervene, that is going to be a nonstarter for China.
As for police problems more generally, I would say that if China is able to reduce some of the police–society conflict in other areas of the country, then this is good for the international community because it leads to a more stable government. We also know that there is a fair amount of international cooperation between police groups. China has police liaisons that travel and learn about practices and technology in different countries. The police in these groups attend conferences and take delegates abroad.
There are also police delegations from other nations that go to China to learn about and exchange best practices. But that work will not necessarily address the underlying issues that we see in a lot of the stations scattered throughout China outside the big cities like Beijing (北京) or Shanghai (上海). Those are the areas with insufficient training or manpower. Those issues must be addressed internally by the Ministry of Public Security.
How is the Chinese government improving its policing capabilities?
Recently, the ministry has tried to overcome manpower and other ground-level policing problems by using surveillance cameras and artificial intelligence. Networks of cameras are appearing all over the country, and police are using body cameras for recording interactions with the public. This type of surveillance is not just in large cities but also in smaller ones. Of course, it is not enough to just put the cameras up—you also need to train officers to use that technology properly. This process takes time, but it is one way that the ministry hopes to overcome on-the-ground problems such as the low number of police per capita.
How might the Hong Kong protests influence or change policing tactics in China?
The situation in Hong Kong is unlikely to change policing tactics in China, which are generally more aggressive in controlling protests than most of what we have seen thus far in Hong Kong. It is more likely that things will go in the other direction, with mainland tactics being used in Hong Kong, especially if we continue to observe increased pressure to bring the protestors in check.
As late as 2006, average emissions for new passenger vehicles registered in the EU were around 161 g/km. As cars became smaller and lighter, that figure fell to 118 g/km in 2016. But this average crept back up, owing to an increase in the market share of gasoline engines, which emit more CO2 than diesel engines do. By 2018, the average emissions of newly registered cars had once again climbed to slightly above 120 g/km, which is twice what will be permitted in the long term.
Even the most gifted engineers will not be able to build internal combustion engines (ICEs) that meet the EU’s prescribed standards (unless they force their customers into soapbox cars). But, apparently, that is precisely the point. The EU wants to reduce fleet emissions by forcing a shift to electric vehicles. After all, in its legally binding formula for calculating fleet emissions, it simply assumes that EVs do not emit any CO2 whatsoever.
The implication is that if an auto company’s production is split evenly between EVs and ICE vehicles that conform to the present average, the 59 g/km target will be just within reach. If a company cannot produce EVs and remains at the current average emissions level, it will have to pay a fine of around €6,000 ($6,600) per car, or otherwise merge with a competitor that can build EVs.
But the EU’s formula is nothing but a huge scam. EVs also emit substantial amounts of CO2, the only difference being that the exhaust is released at a remove—that is, at the power plant. As long as coal– or gas-firedpower plants are needed to ensure energy supply during the “dark doldrums” when the wind is not blowing and the sun is not shining, EVs, like ICE vehicles, run partly on hydrocarbons. And even when they are charged with solar– or wind-generated energy, enormous amounts of fossil fuels are used to produce EV batteries in China and elsewhere, offsetting the supposed emissions reduction. As such, the EU’s intervention is not much better than a cut-off device for an emissions control system.
Adding further evidence, the Austrian think tank Joanneum Research has just published a large-scale study [PDF, in German] commissioned by the Austrian automobile association, ÖAMTC, and its German counterpart, ADAC, that also confirms those findings. According to this study, a mid-sized electric passenger car in Germany must drive 219,000 kilometers before it starts outperforming the corresponding dieselcar in terms of CO2 emissions. The problem, of course, is that passenger cars in Europe last for only 180,000 kilometers, on average. Worse, according to Joanneum, EV batteries don’t last long enough to achieve that distance in the first place. Unfortunately, drivers’ anxiety about the cars’ range prompts them to recharge their batteries too often, at every opportunity, and at a high speed, which is bad for durability.
As for EU lawmakers, there are now only two explanations for what is going on: either they didn’t know what they were doing, or they deliberately took Europeans for a ride. Both scenarios suggest that the EU should reverse its interventionist industrial policy, and instead rely on market-based instruments such as a comprehensive emissions trading system.
With Germany’s energy mix, the EU’s regulation on fleet fuel consumption will not do anything to protect the climate. It will, however, destroy jobs, sap growth, and increase the public’s distrust in the EU’s increasingly opaque bureaucracy.
(from ICRIER Newsletter | November 2019 | Vol. III, Issue 11)
The November 2019 issue of the Newsletter provides a quick recap of ICRIER’s research and policy engagements during the month of October 2019.
Three research reports were released by ICRIER last month in the areas of competition, trade and investment and climate change (See below).
ICRIER also organized consultation workshops, dissemination and outreach events during the month. ICRIER researchers published several articles in leading newspapers and other media platforms on a variety of current issues such as growth, agriculture, trade, FTAs, RCEP, single use plastics and the Economics Nobel. We sincerely hope that you will take a few moments to glance through these updates and engage further with anything that interests you. We hope you enjoy the newsletter’s new format. As always, we welcome your valuable feedback.
Competition Issues in India’s Mobile Handset Industry
(Rajat Kathuria, Mansi Kedia and Kaushambi Bagchi)
Using descriptive statistical analysis, this study examines trade and investment opportunities between India and 41 African and Asianeconomies (mostly LDCs) by focusing on the latter’s export opportunities in the Indian market and on India’s investment opportunities in the selected countries. It also discusses barriers to realizing the identified trade and investment opportunities between India and the selected economies, based on a review of the existing literature.
ICRIER hosted the ICANN66 Pre-Meeting Briefing on 18th October 2019 for its Indianstakeholders. This edition of the Pre-Meeting Briefing looked closely at the developments between ICANN65 and ICANN66 and highlighted some of the key policy discussions currently underway at ICANN. The event witnessed participation from various stakeholders from India, including representatives from the Ministry of Electronics & Information Technology (MeitY), National Internet Exchange of India (‘.in’ registry) along with Indian representatives active in various policy development processes at ICANN. ICANN65 was held in Montreal, Canada, between 2-7 November 2019. ICRIER will also be hosting the ICANN66 Readout during the first week of December 2019 to highlight some of the key takeaways from ICANN66.
Dissemination of the India-LDCs Trade and Investment Study
ICRIER organised Dissemination of the Report Exploring Trade and Investment Opportunities between India and Select African and Asian Economies on October 14, 2019 at Magnolia Hall, India Habitat Centre, Lodhi Road, New Delhi.
Welcome remarks were delivered by Dr. Rajat Kathuria, Director & CE, ICRIER and the Introductory Session was Chaired by Dr. Jayant Dasgupta, IAS (Retd.) Former Ambassador of India to the WTO. Dr. Anirudh Shingal, Sr. Fellow, ICRIER presented the key findings of the report, which was followed by a Panel discussion Chaired by Dr. Arpita Mukherjee, Professor, ICRIER.
They Saved the Worst for Last: Why Trump’s Impending December Tariffs on China Should Be Rolled Back
The terms and deadlines of President Donald Trump’s trade war with China are hard to follow, but one thing is clear: Americanconsumers and businesses should welcome a rollback of impending final rounds of Chinatariffs as part of a possible “phase 1” deal to be announced later in November, say Mary E. Lovely and Yang Liang. Washington has acted against China to punish it for preventing US access to the Chinese market and for violating USintellectual property rights. Beijing is reportedly demanding that impending December tariffs be dropped before they sign any deal. Trump says he hasn’t decided how many tariffs might be lifted.
U.S. Companies Stay Cautious on Spending Under Strain of Trade War [link] Executives signal further pullback in capital expenditure for fourth quarter
Australia: The Campus Fight Over Beijing’s Influence [link] Clashes between pro- and anti-Hong Kong demonstrators have renewed scrutiny over China’s role in western universities
How To Limit Climate Change: Let the Private Sector Do Its Job [link] This year’s U.N. climate summit must give business the rulebook it needs
Evo Morales Flies to Mexico After Being Granted Political Asylum [link] Former Bolivian president boards flight as violence erupts following his resignation
Chile’s Stock Market Drops After Proposal To Rewrite Constitution [link] Investors fear that the move by Sebastián Piñera would undermine the economy
Alibaba Aims To Deliver With $16bn Courier Venture [link] Chinese ecommerce group follows Amazon in focusing on logistics
Trade Optimism Awaits a Big Test [link] Mike Mackenzie’s daily analysis of what’s moving global markets
