U.S. Climate Policy: Take Five

James K. Boyce

“For the sake of our children and our future, we must do more to combat climate change.” These words in President Obama’s State of the Union address came as music to the ears of environmentalists. Do they herald a real effort to break the climate policy impasse in Washington?

Obama urged Congress to pursue a “bipartisan, market-based solution,” citing as a model the cap-and-trade bill sponsored by Senators John McCain and Joseph Lieberman.

The McCain-Lieberman bill failed to clear the Senate in 2003. It failed again in 2005. So did two subsequent cap-and-trade bills, Lieberman-Warner in 2008 and Waxman-Markey in 2010. Any new effort to enact a national climate policy will be the fifth try.

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Agriculture for Africa’s Development: In Search for a Champion

Leonce Ndikumana

The recent growth resurgence in Africa has dominated the news in the media as well as debates in the development community over the past years. This growth resurgence has important features that are distinct from previous growth accelerations, and inspire the optimistic view that, maybe, Africa could be on a path of more sustained growth. A key feature is that, unlike previous growth episodes, recent growth is not just a natural resource story; in particular, it is not just an oil story. Many among the high growers are resource-poor countries whose economies are primarily agriculture-based, such as Ethiopia, Malawi, Rwanda, Uganda and others. Even in the case of oil producers such as Nigeria, agriculture has emerged as a substantial contributor to growth. If Africa is to “conquer the 21st century” it has to rekindle its love for its agriculture.

In the inaugural lecture of the Speaker Series of the African Development Policy program at the Political Economy Research Institute on 22 February 2013, Professor Calestous Juma of Harvard Kennedy School charted a new strategy for Africa’s future based on technology and innovation-driven agricultural development. In his recent book, New Harvest: Agricultural Innovation in Africa, Calestous Juma provides a blue print for an agricultural development strategy based on four pillars: science and technology, infrastructure, technical capacity, and entrepreneurship. But for this strategy to succeed, it needs new institutions to implement the programs, and, most importantly it requires a developmental leadership that can unify the various centers of decision making (e.g., ministries) and mobilize resource allocation around the agriculture development agenda.

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30 years of financial inefficiency

Arjun Jayadev

One of my favorite lines from recent economics papers is the following one from this paper by Thomas Phillipon, who in talking about the performance of the financial sector suggests that “the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.”

The claim that the financial sector has been ‘functionally inefficient’ was made 30 years ago by James Tobin, and it’s great to have a quantitative basis to make this sort of judgment. Another way to have some sort of handle on the degree to which intermediation has become more expensive is to look at the spread between funding costs and lending rates.

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Euro Area Banking Union

Philip Arestis and Malcolm Sawyer

The EU summit meeting, 28th/29th June 2012, took a number of relevant decisions in terms of a possible euro area banking union. However, this particular set of decisions was more about initial steps rather than steps for a significant move towards such a union. The relevant decisions are related to: banking supervision by the ECB; banking licence for the European Stability Mechanism (ESM); The ESM will provide financial assistance to members of the euro area when in financial difficulty. It was established on 27th September 2012, but will not come into full operation before 2014. It will function as a permanent firewall for the euro area with a maximum lending capacity of €500 billion. It will replace the two existing temporary EU funding programmes: European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). ESM member states would be able to apply for an ESM bailout when they are in financial difficulty or their financial sector is a threat to stability and in need of recapitalization. Another precondition for receiving an ESM bailout will be that the member state must have fully ratified the Fiscal Compact (see our blog of December 2011 for more details on the Fiscal Compact); when the ESM is introduced, it will have access to the ECB funding and this will greatly increase its firepower. Germany objected to the latter proposal on two grounds: the ECB should not be responsible for all 6000 euro area banks (including small banks such as Germany’s regional savings banks); and there should be a clear separation between ECB monetary policy and bank supervision. The relevant European Council statement (adopted on 18th October 2012) insists on such a separation, and yet no focused explanation is provided for such a need. We would argue that such separation is not acceptable. Central banks need to play a key role in supervising banks as the “great recession” has demonstrated. A good example is the case of the Bank of England, where the removal of banking supervision from this Bank in 1997 has now been reversed.

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No Standards, Not Poor

C.P. Chandrasekhar

Early February, the Department of Justice (DoJ) of the US government—represented by the United States attorney general and supported by attorneys general from 16 states—filed civil fraud charges against the ratings giant Standard & Poor’s (S&P). S&P is the largest of the big three agencies—the other two being Moody’s and Fitch—which, for a fee, take on the task of assessing how risky and robust securities of different kinds issued by financial firms are.
The charges were not minor. The DoJ argues that for more than three years between September 2004 and October 2007, S&P “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in mortgage-related securities. This was the period when S&P was raking in huge earnings by granting high ratings to complex and opaque derivatives named “collateralised debt obligations” (CDOs) based on mortgage bonds. The DoJ’s case reportedly focuses on 40 such CDOs created at the height of the US mortgage bubble, the rating of which gave S&P $13 million in fees. These bonds went bust, resulting in losses to investors. The DoJ not only claims that S&P knew this could happen when it gave them high ratings or left them unrevised, but also that it misinformed investors by arguing that its ratings “were objective, independent, uninfluenced by any conflicts of interest.”

Progress on punishing institutions seen as responsible for the 2008 crisis has been slow. So it has not just been business as usual for these firms, but license to do things that seem substantially aimed at regaining the credibility they lost in the aftermath of the crisis. The most controversial of these was its decision to downgrade the long-term credit rating of the United States from AAA to AA+ in August last year during the standoff between the Democrats and Republicans over ratifying an increase in the prevailing ceiling on US public debt.

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Not-so-smart ALEC: the right wing vs. renewable energy

Frank Ackerman

Renewable energy is clean, sustainable, non-polluting, reduces our dependence on fossil fuels, improves the health of communities surrounding power plants, and protects the natural environment. Who could be against it?

Answer: The American Legislative Exchange Council (ALEC), a lobbying group that is active in drafting and advocating controversial state legislation. They’re not just interested in energy: in recent years ALEC has supported Arizona’s restrictive immigration legislation, the “Stand Your Ground” gun laws associated with the shooting death of Trayvon Martin, and voter identification laws proposed in many states. ALEC’s priorities for 2013 include making it harder to bring product liability suits against manufacturers of defective products, ending traditional pension plans for public employees, promoting the diversion of public education funds into private schools and on-line education schemes, and supporting resistance to “Obamacare” health policies.

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Does It Matter Who Will Be The Next Director of the WTO?

M. Shafaeddin

This coming spring, a new Director General of the World Trade Organization (WTO) is to be chosen. Nine candidates have thrown their hats into the ring to replace Pascal Lamy, the current Director General (DG). A recent forum and debate was held with five of the candidates at the Institute of Management and development (IMD-Lausanne, Switzerland), which prompted a lively discussion as to why the press is not paying more attention to the contest to replace Lamy or the candidates vying for this position.

In my view, the main issue is not the question of awareness of the press on the appointment of the DG. Far more important are key issues surrounding the functions and the philosophy behind GATT/WTO rules.

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Central Bank Autonomy: A Dangerous Mirage

Alejandro Nadal

The global financial crisis is breathing and evolving. In Europe it is treated as a sovereign debt crisis. But given the fact that the crisis exploded in the midst of the private financial sector, how did we get here?

Four decades ago, more precisely on January 3 1973, a new law on central banking was approved in France. The new statute for the Banque de France contained critical provisions for the independence of the monetary institute. Article 25 turns out to be particularly relevant for today’s debate on Europe’s crisis. It stated that the Treasury would not be able to resort to the Banque de France to borrow money.

This represented a historical transformation in public finance and left the State at the mercy of the private commercial banking system. Instead of using the money emission capacity of the central bank, the French government had now embarked on a new course, one that turned out to be a milestone in financial liberalization. Many other countries followed this example. Incidentally, when the law was passed Georges Pompidou was the President of France. He had been director of the Banque Rothschild between 1956-1962, a fact that generated suspicion as to the motivations of the Loi 73-7 of 1973.

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Yellen to Washington, D.C.: Fiscal Austerity Slows Recovery

Thomas Palley

Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity.

Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation.”

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Banks on the Counter-Attack in the Food and Finance Debate

Jennifer Clapp

NGOs have stepped up their critique of large investment banks’ involvement in agricultural commodity derivatives markets in recent months. Now, it appears that the banks are starting to fight back.

Last September, the World Development Movement estimated that Barclays earned some $785-million from financial speculation on food commodities in 2010 and 2011. And last month a new WDM report estimated that Goldman Sachs’ earnings from food price speculation in 2012 were over $400 million.

These figures were the latest to come out of a prominent NGO campaign against ‘gambling on hunger’ that has captured widespread attention and concern, particularly in Europe, over the past few years. Investment banks have been a primary target of this campaign, given their important role in facilitating large-scale financial investments in agricultural commodity derivatives, which NGOs say is responsible for food price spikes and rising hunger in the world’s poorest countries.

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