Global Economy

Olivier Blanchard, the IMF’s economic counsellor, stated last June that “many, including me, believed that keeping the peg was likely to be a recipe for disaster, for a long and painful adjustment at best, or more likely, the eventual abandonment of the peg when failure became obvious.” He has been proved wrong.

According to the IMF, Latvia tightened its cyclically adjusted general government deficit by 5.3 per cent of potential GDP between 2008 and 2012,

But Greece’s tightening was 15 per cent of potential GDP between 2009 and 2012.

There is something ridiculous about a tax system that encourages an American company to invest abroad rather than in the United States. But that is what we have.

“The fundamental problem we have in trying to tax corporations is that corporations are global,” says Eric Toder, co-director of the Tax Policy Center in Washington. “It is very, very hard for national entities to tax entities that are global, particularly when it is hard to know where their income originates.”

Some international companies hate that idea, of course. They warn that we would risk making American multinational corporations uncompetitive with other multinationals, and perhaps encourage some of them to change nationality.

It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain.

“It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”

it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights.

Walking around town, my friend and I had noticed that almost every home had a pile of coal outside, soft dark chunks that people shoveled into stoves for cooking and heating. Thousands upon thousands of coal fires were loading the air with tiny dots of soot. Scientists have taken to calling these dots “black carbon,” and have steadily ratcheted up their assessments of its harm. In March, for instance, a research team led by a Mumbai environmental group estimated that black carbon and other particulate matter from India’s coal-fired power plants cause about 100,000 deaths a year.

A 31-scientist team from nine nations released a comprehensive, four-year assessment in January arguing that planetary black-carbon output is the second-biggest driver of anthropogenic (human-caused) climate change; the little black specks I found on my glasses and clothes have roughly two-thirds the impact of carbon dioxide.

The rule of thumb is that if a well leaks more than about 3 percent” of its methane production into the air, “natural gas actually becomes dirtier than coal, from a climate-change perspective,

Simple? Yet, not a single person on the face of this earth knows how to make me.

Not much meets the eye—there's some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.

a cedar of straight grain that grows in Northern California and Oregon

As for equity levels, in many cases a foreign bank might simply have to convert loans it had made to the American operation into equity investments. Suddenly the American operation would appear to be better capitalized.

European regulators who trusted Iceland to regulate its own banks wound up paying off depositors even though there is little hope Iceland will ever reimburse those payments.

It turns out that in the financial crisis, big banks with high leverage ratios — that is, more capital relative to assets — were significantly more likely to survive without needing bailouts.

The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed.

Consequently, innovation at the frontier depends on funding sources that are decoupled from concern for economic value;

Financial speculation has been, and remains, one required source of funding. Financial bubbles emerge wherever liquid asset markets exist. Indeed, the objects of such speculation astound the imagination: tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities.

In the second narrative, the world’s largest banks remain too big to manage and have strong incentives to engage in precisely the kind of excessive risk-taking that can bring down economies. Last year’s “London Whale” trading losses at JPMorgan Chase are a case in point. And, according to this narrative’s advocates, almost all big banks display symptoms of chronic mismanagement.

I had the opportunity to talk with senior officials and their advisers from various countries, including from Europe. I asked all of them the same question: When will we have a binding framework for cross-border resolution?CommentsView/Create comment on this paragraphThe answers typically ranged from “not in our lifetimes” to “never.” Again, the reason is simple: countries do not want to compromise their sovereignty or tie their hands in any way.

As King struggled with the crisis, he concluded that the biggest vulnerability was the solvency of the banking system itself. The crash wasn’t just a liquidity squeeze caused by toxic assets; the problem was that big banks around the world were undercapitalized and, in many cases, insolvent.

King pushed the banks to recapitalize and, later, to accept more regulation. This upset a financial elite that, as King says, was the only sector of the British economy that had escaped the market revolution of the Margaret Thatcher years.

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.

Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen.

But with its warm weather and beaches, Spain was also the Florida of Europe — and like Florida, it experienced a huge housing boom. The financing for this boom came largely from outside the country: there were giant inflows of capital from the rest of Europe, Germany in particular.

It’s true that the U.S. economy has grown faster than that of Europe for the past generation. Since 1980 — when our politics took a sharp turn to the right, while Europe’s didn’t — America’s real G.D.P. has grown, on average, 3 percent per year. Meanwhile, the E.U. 15 — the bloc of 15 countries that were members of the European Union before it was enlarged to include a number of former Communist nations — has grown only 2.2 percent a year. America rules!

Or maybe not. All this really says is that we’ve had faster population growth. Since 1980, per capita real G.D.P. — which is what matters for living standards — has risen at about the same rate in America and in the E.U. 15: 1.95 percent a year here; 1.83 percent there.

Broadband, in particular, is just about as widespread in Europe as it is in the United States, and it’s much faster and cheaper.

Bear in mind that the implosion of the 1990s stock bubble, while nasty — households took a $5 trillion hit — didn’t provoke a financial crisis. So what was different about the housing bubble that followed?

The short answer is that while the stock bubble created a lot of risk, that risk was fairly widely diffused across the economy. By contrast, the risks created by the housing bubble were strongly concentrated in the financial sector. As a result, the collapse of the housing bubble threatened to bring down the nation’s banks. And banks play a special role in the economy. If they can’t function, the wheels of commerce as a whole grind to a halt.

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.

In this world, financial bubbles matter, capital flows are of dubious merit, low interest rates fail to stimulate growth and government spending becomes the only tool with real traction to spur economic activity.

With total government debt in the rich world stuck at around 100 percent of its combined economic output, there is a legitimate fear that a rise in interest rates could tip off a financial death spiral. Moreover, if countries with debt levels well under 50 percent of G.D.P. were so devastated by the crisis, it is hard to imagine what might happen to them if another were to hit them.

If so, the urgent task is what kind of limits should be imposed on banking and the rest of finance to temper its propensity to careen toward disaster.

How did this happen? As Kemal Derviş has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland, and Germany is now around $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G-7 (including Germany) regularly scolded the Chinese for fueling global imbalances.

The second exception is France. Over the last year, France’s external deficit deteriorated further, from a 2.4% to 3.5% of GDP. France now faces zero or negative growth in 2013, and seems to have reached the point at which it must reverse course on competitiveness or risk more trouble ahead.

Virtually all of the vehicles sold in China are manufactured either by Chinese automakers or, more often, by multinationals in joint manufacturing ventures with Chinese automakers. Most Chinese automakers in turn are owned by local governments that also have considerable control over local courts, making the automakers nearly invulnerable to private litigation.