Friday, September 17, 2021

My latest column analyses the Canadian election campaign.

Trudeau has taken a gamble in calling an early election

On 20th September, Canadians go to the polls, in an election that no one much wanted, except for incumbent Prime Minister Justin Trudeau of the Liberal Party. At the helm of a minority government since 2019, Trudeau called an election two years early, in the hopes of capitalizing on Canada’s successful vaccination campaign to entice the voters into returning his government with a majority.

The snap election, in the midst of a burgeoning fourth wave of the still ongoing COVID19 pandemic, has been much criticized, but, according to Canadian law, the head of state, Governor General Mary Simon, did not have any choice but to grant Trudeau’s dissolution request and drop the election writ. This was even despite Trudeau’s minority government not having been defeated in a confidence vote, and therefore still enjoying the confidence of the House of Commons.

As your columnist has noted on previous occasions, Canada’s brand of the Westminster model gives almost unlimited power to an incumbent prime minister, much more than the power enjoyed by his or her counterpart in the United Kingdom or in India. The prime minister not only appoints the head of state but members of the Supreme Court, as well as filling any vacancies in the Senate, the unelected upper house of Parliament. This would be akin to a Prime Minister of India appointing the President, appointing members of the Rajya Sabha, as well as the Supreme Court. Likewise, in the U.K. and India, an incumbent prime minister has only limited ability to change the normal electoral calendar — which in India is decided by the Election Commission and in the U.K. is governed by the Fixed-Term Parliament Act. Canada, in theory, also has a fixed term law, but it is essentially toothless, and, in effect, only puts an upper limit on the lifespan of a government, rather than preventing a prime minister from opportunistically calling an early election midway through the government’s mandate.

If the polls are to be believed, Trudeau’s gamble is not likely to pay off, as the Liberals are running neck-and-neck with the main opposition, the Conservative Party, led by Erin O’Toole, its new leader. At the time of filing, it appears to be a coin toss whether the Liberals or Conservatives will win the election, which will almost certainly be a minority. A minority government would be vindication for O’Toole, who became party leader after a fractious leadership battle and that too in the midst of the pandemic. For Trudeau, it would be a major defeat, given that he had called an election for the self-evident purpose of winning a majority. His leadership would most certainly be in doubt and the knives within his party would certainly be out for calling the gamble of calling a premature election and then losing the bet.

The election is also a test for Jagmeet Singh, leader of the New Democratic Party (NDP), a social democratic party that stands to the left of the Liberals. The NDP perennially run third, or sometimes even fourth, behind the Quebec separatist Bloc Quebecois, and have never sniffed victory, although Singh did play a pivotal role in keeping Trudeau’s minority government afloat the past two years. More interesting, perhaps, is the rise of the People’s Party of Canada (PPC), a conservative party that stands to the right of the Conservatives. The party was founded by Maxime Bernier, a former Conservative, who lost a bitter leadership contest with O’Toole, and then left the party to start his own. Canada has not, until now, had a viable right wing party, and, while under Canada’s first-past-the-post electoral system, the PPC, like the left wing Greens, are unlikely to win more than a handful of seats, at best, they could become increasingly important going forward, especially if they are able to pull the Conservatives back to the right and away from the crowded centre that they share with the governing Liberals. Likewise, if the Greens eat into the NDP’s votes, that might induce Singh to pivot further to the left.

For an election that Trudeau had described as “pivotal”, in an attempt to sell it to voters, the campaign has been singularly devoid of substance, with little daylight between the solidly centrist positions of the two main parties. Trudeau had attempted to create a wedge issue with his support for mandatory vaccination for federal employees and in other areas under federal jurisdiction, in the hopes of baiting O’Toole, whose party has its share of “anti-vaxxers”; likewise, Trudeau has raised the bogeyman of a putative privatization of Canada’s socialized healthcare system were the Conservatives to win. It is unclear how many, if any, of the undecided voters may be swayed by either of these issues. (Note: The Alberta crisis, with Conservative Premier Jason Kenney declaring a state of emergency, admitting he had mishandled the COVID19 pandemic, which may also hurt the federal Tories, occurred after this piece was filed.)

Looked at from India’s vantage point, given the frictions with Trudeau over his public comments on the farmer protests in India, and the memory of his disastrously failed India visit in 2018, which your columnist had elsewhere described as a “slow-moving train wreck”, New Delhi mandarins are unlikely to be terribly disappointed if Trudeau is shown the door. Having said that, O’Toole does not enjoy the close personal relationship and obvious chemistry that Prime Minister Narendra Modi enjoys with the previous prime minister, the Conservative Stephen Harper, and is himself new in the job. Don’t expect any major shift in the moribund Canada-India bilateral relationship, no matter the outcome of the election no one wanted.

Monday, September 6, 2021

My latest Mint column, on how dollar hegemony threatens emerging markets, revising the old Triffin Paradox.

As the last instalment of this column observed (“The dangers of continuing with unconventional policies”, 20 August), there is a rising drumbeat of debate about the unwinding of US “unconventional monetary policies” — in particular, large scale asset purchases, more commonly called “quantitative easing” — as well as the eventual normalization of the policy interest rate to above the near-zero level at which it has been stuck since the global financial crisis.

The topic came up for discussion during the recent (virtual) Jackson Hole meeting of the US Federal Reserve, where Fed chief, Jerome Powell, sent the markets his strongest signals yet that the US central banks is preparing to wind down its asset purchases, at present a staggering $120 billion per month. In a much-watched speech, Powell asserted that “substantial further progress” has been made on the Fed’s twin goals of keeping inflation on a low and stable path and the economy moving closer to full employment.

The minutes of  a recent Federal Open Mark Committee (FOMC) meeting, which sets Fed policy, and which met before the Jackson Hole event, suggests a broad-based consensus amongst committee members that QE should start winding down later this year, although it is expected that the Fed will continue to hold an elevated stock of bonds even as the inflow of additional purchases tapers and eventually comes to a stop.

It is noteworthy that, in Powell’s remarks, he sharply distinguished the tapering of QE from interest rate normalization, noting that a much more “stringent test ” would apply to the latter operation. The significance of this important distinction should not be passed over lightly.

Readers will recall well the 2013 “taper tantrum” crisis, on which your columnist has dilated on, and which created a panic in global financial markets — especially, emerging economy stock, bond, and currency markets — after then Fed chief, Ben Bernanke, rather loosely remarked that the Fed was planning to begin dialling down its asset purchases, without being terribly clear on his likely forward guidance on a glide path for interest rate normalization.

Speaking on the possibility of Fed tapering in an interview to the Financial Times (“Emerging economies cannot afford ‘taper tantrum’ repeat, says IMF’s Gopinath”, 29 August), International Monetary Fund chief economist, Indian-born, American economist Gita Gopinath, warned that emerging economies could not “afford” a repetition of the 2013 taper crisis. She told the FT: “[Emerging markets] are facing much harder headwinds….They are getting hit in many different ways, which is why they just cannot afford a situation where you have some sort of a tantrum of financial markets originating from the major central banks.”

The danger that Gopinath and others have pointed out is that higher or stickier than expected inflation in the US will  likely prompt the Fed to more aggressively ramp up interest rates as part of an accelerated normalization of monetary policy.

The danger scenario for emerging economies, especially heavily indebted ones, would be the twin blows of rising debt service costs on their dollar-denominated debts as well as the likely outflow of a large quantum of capital funds enticed by the now higher returns to be earned in dollars, to say nothing of the safe haven value of the dollar in times of economic volatility. Indeed, this is exactly what spooked the markets, and hobbled many key emerging economies, including India, back in 2013.

If such a “double whammy” scenario, as Gopinath terms it, returns today on the back of Fed tightening, the IMF estimates that $4.5 trillion of global gross domestic product could be wiped out by 2025. What is worse, the hit will likely falling disproportionately on low income developing and middle income emerging economies, according to former IMF chief economist, Maurice Obstfeld, also speaking to the FT. The fact that these economic shock waves would emanate in the context of a pandemic crisis that is worsening in many parts of the still largely un-vaccinated developing world might just make this the perfect storm.

In an unusually candid (as well as rather canny) comment, Gopinath observed that one of the difficulties at the time of Bernanke’s 2013 remarks that touched off the taper crisis was his announcement on QE tapering got “mixed up” with market expectation of more rapid interest rate normalization. This confusion may, indeed, have abetted the seriousness of the 2013 crisis, as it created greater uncertainty, with many more “carry trade” and other speculative investors in the emerging markets bolting for the door at the same time. She noted that, this time around, “super clear communication” is the need of the hour, and suggested that Powell is doing a good job. The implied criticism of Bernanke’s poor communication in 2013 is the understated inference.

Some perspective may be useful. As I noted in one of my earliest columns in this newspaper (“Illusions bred by a reserve currency”, 17 July 2014), reliance on a single global reserve currency, the US dollar — whether de jure, under Bretton Woods, or de facto, as at present — creates a peculiar dilemma, noted in the 1960s by economist Robert Triffin: the short term, domestically driven goals of the reserve currency economy may diverge from long term needs of the global economy. Inevitably, the hegemonic large country, which provides the reserve currency as a global public good, will privilege itself, at the expense of the rest of the world. The “Triffin paradox” is still with us.

Friday, August 20, 2021

My latest, on the peril of indefinite loose monetary policy.

Are “unconventional” monetary policies (UMPs) deployed by the advanced economies a cure worse than the disease? Your columnist has asked this question on numerous occasions in recent years, as it becomes increasingly evident that the harmful side effects of UMPs, which helped alleviate the worst symptoms of the global financial crisis, are increasingly distorting not only the financial sector but the real economy as well, and causing serious and harmful “spillover” effects on emerging economies such as India.

Raghuram Rajan, former governor of the Reserve Bank of India, has been a well-known critic of UMPs, and, in particular, the damaging effects of the “taper tantrum” of 2013, in which then Federal Reserve Board chair, Ben Bernanke, had to walk back from plans to taper the large scale asset purchases — commonly called “quantitative easing” — after his remarks that they would begin to taper, touched off a firestorm in international financial markets, and hit emerging economies, including India, especially hard.

Recently, Rajan penned a column (“The Dangers of Endless Quantitative Easing”, Project Syndicate, 2 August), in which he weighed in on the current debate occurring amongst members of the Fed as well as academic and bank and corporate economists on whether it is now high time for the Fed to taper its asset purchases, at present $120 billion per month. Rajan’s view is that supply constraints are now more pertinent than insufficient demand, and excessively accommodative monetary policy runs the risk of stoking inflation, which would have fiscal implications in the medium to longer rum, increasing the servicing costs on the large stock of government debt due to interest rates that will eventually have to go up as inflation begins to spike.

On 18 August, speaking to the Financial Times (“Top Fed official warns massive bond purchases are ill-suited for US economy”), Eric Rosengren, president of the Boston Fed, threw his weight behind the Fed board beginning to taper after it meets next month, with the aim of winding down asset purchases altogether by the middle of next year, again citing supply constraints, such as the difficulty employers in the US are encountering finding workers, even as they offer higher wages. Importantly, Rosengren pointed to the harmful effects of asset price appreciation and “undue leverage”, as fund managers take on more and excessive risks in the search for yield in a low-interest environment.

Ironically, asset price bubbles fuelled by leverage and low interest rates were the proximate cause of the global financial crisis to begin with, and they are in play once again as a serious side effect of low interest rates and asset purchases used to combat the effects of the crisis. This is a little like someone suffering insomnia, who then gets hooked on sleeping pills, and is unable to taper them and ends up taking them for life. Unless the US, and other advanced economies, begin to take seriously the need to pull back from UMPs, this is the situation we may end up in.

It is worth reminding ourselves that debates about monetary policy are not merely an esoteric pastime for central bankers and finance gurus. Rather, excessively loose monetary policy has long-lasting and perverse effects on the real economy, too. One of the most damaging of these side effects is the increase in wealth and income inequality that has been abetted by low interest rates and asset price inflation.

It is, after all, the already wealthy who have money to invest, and skyrocketing asset prices, everything from property to antique automobiles, boosts their wealth and income. By contrast, lower income households put their money in the bank, where they earn low, almost zero, interest rates that barely keep pace with inflation.

There is more than a little bit of irony in the fact that loose monetary policy, which has received widespread support from left-leaning economists in the US, actually has done more to worsen inequality than the effects, say, of former President Donald Trump’s tax cuts, which were widely criticized for being pro-rich. A recent study, reported on by Bloomberg (“U.S. Wealth Gap Rises With Jackson Hole Coming at the Top”, 18 August), documents widening wealth gaps between the top and bottom deciles of US counties. Looking at income from assets, in particular, interest, dividends, and rents, on a per capita basis, the top 10 percent of counties earned about $20,000 in asset income per person, on average. Meanwhile, in the bottom 10% of counties, that figure was only about $7,500. This has very little to do with the structure of taxation and very much to do with the distorting effects of low interest rates and frothy asset prices.

There are also more conventional dangers that lurk, unless the Fed and other advanced economy central banks get serious about winding down asset purchases and returning policy interest rates to more normal territory and away from near zero. During the “great moderation”, a long period of low inflation that preceded the financial crisis, there was a smug insouciance amongst central bankers and even academic economists that high inflation was a thing of the past. But with inflation now starting to tick up in the US and elsewhere, that smugness may soon evaporate, as Fed officials realize that it is far from easy to put the inflation genie back in the bottle, once it has been uncorked.

Tuesday, August 10, 2021

My next Mint column on the pandemic at an inflection point. The on-line version is unavailable due to a technical glitch. The text as filed is placed below.

The pandemic at an inflection point calls for extra care

Vivek Dehejia

Fully a year and a half into the COVID19 global pandemic, the world appears to be at an inflection point in the management of the virus, and a clear divide is emerging between advanced and emerging countries. Last time, your columnist discussed the pros and cons of the United Kingdom’s re-opening plan, with the penultimate stage of unlocking on 19 July — dubbed “Freedom Day” by the British tabloids — while cases were still on the rise, driven by the Delta variant.

As I noted then (“Boris Johnson is taking a big gamble with ‘Freedom Day’”, 26 July), Prime Minister Boris Johnson was taking a big gamble on re-opening under such circumstances. The gamble appears to have paid off. After coming to a crest, new infections have begun to taper off, and serious illness, hospitalization, and morality remain far below the levels of earlier waves of the pandemic, which preceded widespread vaccination. If things go according to script, the UK is poised to remove removing pandemic-era restrictions later this month.

By contrast, in the United States, a clear divide has emerged between the “Red” (Republican) and “Blue” (Democratic) states — the former have relatively low levels of vaccination compared to the latter — not due to any supply constraints — the US is awash in vaccines — but due to vaccine hesitancy, which is much higher amongst Republicans, especially supporters of former President Donald Trump. While Blue states, such as New York, press ahead with re-opening, while maintaining some pandemic-era restrictions, such as social distancing and mask mandates, Red states are seeing a surge in new infections even as many, such as Florida, have eliminated all pandemic-related restrictions. Florida’s governor, Ron DeSantis, has gone so far as to ban local jurisdictions from re-imposing mask mandates, which the state has eliminated.

Meanwhile, Canada, the other major Anglo-American country in the Western hemisphere, has taken something of a middle path. With high rates of vaccination, most Canadian provinces are on a re-opening path, albeit at different speeds. Thus, while Ontario, the largest province, retains a mask mandate in indoor spaces, other provinces, such as Alberta, have eliminated it. Absent a major new Delta-driven outbreak, which cannot be ruled out, Canada as a whole appears to be on track for a return to normalcy, more or less, by later this autumn or early winter.

Variations of this pattern may be observed in other advanced Western countries, such as in Europe, all of which have now attained relatively high rates of vaccination, and most of whom are now well on a re-opening path. This summer has seen the return of major music festivals, such as the Salzburg Festival in Austria, with relatively few restrictions. Indeed, the festival had even dispensed with mandatory mask use inside the concert and theatre venues, until a fully vaccinated ticket holder tested positive. The mask mandate was hastily re-introduced, but few other restrictions remain. A short distance across the border in the German state of Bavaria, the Bayreuth Festival, devoted to the music of the 19th century composer Richard Wagner, is also back in full swing. Intra-European travel has also, just about, returned to normal, and foreign tourists have also returned.

The story, however, is very different in most of the emerging and developing world, where rates of vaccination, even of first doses, remain low, with full vaccination percentages often in the single digits. These countries, spanning the world from Latin America to Africa and Asia, remain acutely vulnerable to outbreaks of the virus, especially the virulent and highly transmissible Delta variant. Recent weeks have seen major outbreaks across Southeast Asia somewhat reminiscent of the devastating second wave that India experienced earlier this year.

The world now stands on the cusp of a two-speed recovery — both from the pandemic and of the economy — driven by differential vaccination rates in the rich as compared to the poor countries. This has fuelled cries for “global vaccine equity”, and even the World Health Organisation (WHO) has thrown its weight behind the idea. Recently, the WHO called for a pause on “booster” doses being planned in several rich countries, arguing that the need of the hour is to ramp up vaccination rates in the developing world. It is indeed a tragedy that, as rich countries such as the US and Canada sit on vast stockpiles of vaccines, many of which are sure to expire unused, there are millions of people in poorer countries still awaiting a second, or in many cases, even a first jab.

The major international financial organisations, such as the World Bank and the International Monetary Fund, as well as banks, investment houses, and management consultancies, have also lent their weight to the argument, as report after report show that ongoing pandemic-related restrictions in many developing countries will be a drag on the global economic recovery.

The implicit argument, although it is rarely stated directly, is that it is in the enlightened self-interest of the rich world to ensure that poorer parts of the world quickly get up to speed on vaccination, else the consequences will be dire for the rich world itself. Not only will the incipient global economic recovery stall, but denizens of the rich countries will be at risk from infection through successive putative new variants of the COVID19 virus against which the vaccines currently in use will presumably be less effective.

Much is at stake as the world stands at this inflection point.

Vivek Dehejia is an associate professor of economics and philosophy at Carleton University in Ottawa, Canada.

Sunday, July 25, 2021

Boris Johnson is taking a big gamble with ‘Freedom Day’ -- my latest Mint column

With their usual flourish, British tabloids dubbed 19 July as “Freedom Day”, or, more prosaically, the day that the United Kingdom entered stage four of its re-opening plan. This was the day, delayed by four weeks, on which most remaining COVID19 pandemic-related restrictions were lifted in the UK. Some restrictions remain, such as the need for workers to self-isolate if they are pinged by the official contact testing and tracing app, and local bodies continue to impose their own restrictions — such as mandating mask use on the London Underground. But, in the main, most pandemic-era restrictions are gone: mask use is now voluntary, not compulsory (except where otherwise mandated), social distancing (already honoured in the breach rather than the observance for the past many weeks) is a thing of the past, and capacity limits have been lifted at restaurants, concert halls, theatres, and other public places.

There is much that can be criticized in British Prime Minister Boris Johnson’s handling of the pandemic, and there has been much criticism by epidemiologists and other experts of the decision to go ahead with a full re-opening, in the face of sharply rising infections, and, even more worryingly, upticks in hospitalization and deaths, due, in large part, to the ubiquity of the delta variant, which is highly transmissible and has greater immune-escaping properties than the conventional COVID19 virus — meaning that it is possible for those already fully vaccinated to become infected. Additionally, while the full vaccination rate in the UK is about 50 percent, those under 18 have not been vaccinated. Anecdotal evidence, too, suggests that, despite almost half of all Britons now vaccinated, some parts of British inner cities, including London, have vaccination rates less than 30 percent. All of this spells potential trouble.

In light of this, it is striking that in a video message shared on 18 July via Twitter , UK Prime Minister Boris Johnson offered this rationale for the re-opening, in the form of a rhetorical question: “If we don’t do it now, we’ve got to ask ourselves, when will we do it?” As he also remarked, due to the high vaccination rate (but recall the caveats I noted above), new infections have now largely been decoupled from new hospitalizations and increased mortality. A similar logic has underpinned the elimination of pandemic-era restrictions in a number of states of the United States — mostly the “Red” rather than “Blue” states, that is, those with Republican rather than Democratic governments — and the same underlies the sentiment increasingly heard from political conservatives in the Anglo-American sphere, that, post-vaccination, COVID19 should be seen as another, albeit an especially, nasty flu, and cannot be the basis for lockdowns and restrictions without end.

As your columnist has noted on previous occasions, lockdowns and other restrictions intended to flatten the curve of COVID19 infections pose a difficulty very similar to that posed by the deployment of unconventional monetary policies, most notably “quantitative easing” (QE) after the global financial crisis: how and when does one exit? Just as the unwinding of QE was repeatedly delayed in the US and other countries, and then put into reverse by the onset of the global COVID19 pandemic, exit from lockdowns and restrictions have either been open-ended or continually extended in most advanced Western countries.

The difficulty in finding the correct time to exit from restrictions and re-open the economy is, at one level, a matter of the trade-offs between the economic, psychic, and other benefits of earlier re-opening being weighed against the costs of increased infections, hospitalizations, and deaths, similarly due to re-opening, and as predicted by all of the standard “agent-based” epidemiological models (although the deficiency of these class of models, in ignoring behavioural responses by the public, have also been noted by your columnist).

But, this is not the whole story. An additional rationale for prudence comes from political economy considerations. I would hypothesize that, other things equal, if an earlier re-opening goes well, the public is likely, at best, to look perhaps a little more favourably on the incumbent politician who went ahead with it. On the other hand, if things go badly, the incumbent is likely to be severely blamed by the public for a premature re-opening.

This crucial asymmetry in the “payoff matrix” (in the jargon of game theory) to the incumbent politician between the two scenarios will naturally induce caution, likely greater than would be warranted on the basis of a scientific benefit-cost analysis alone. In simpler terms, re-opening earlier with things going well may give a little fillip to the incumbent, but will not guarantee re-election, while things going badly will almost certainly spell disaster at the polls. It is, thus, much safer for a prudent politician, with an eye on the next elections, to be excessively cautious and delay re-opening beyond what would be necessary from the point of view of what is good for society.

A perfect example of this is the continuation of lockdowns and other restrictions in Canada, the caution of whose political leaders contrast sharply with the UK; striking, given the similar full vaccination rates in both countries. There is no doubt that Johnson is taking a big gamble with Freedom Day — you can be sure political leaders the world over will be watching with great interest.

Vivek Dehejia is associate professor of economics and philosophy at Carleton University in Ottawa, Canada.