Since former Federal Reserve Chairman Ben Bernanke uttered the word "taper" in June 2013, emerging-market stocks and currencies have taken a beating. It is not clear why talk of (thus far) modest reductions in the Fed's large-scale asset-purchase program should have had such big repercussions outside the United States. The best economic explanation is that capital has been flowing out of emerging markets in anticipation of future rises in U.S. interest rates, of which the taper is a harbinger. While plausible, that cannot be the whole story.
For it is not only U.S. monetary policy that is being tapered. Even more significant is the "geopolitical taper." By this I mean the fundamental shift we are witnessing in the national-security strategy of the U.S.—and like the Fed's tapering, this one also means big repercussions for the world. To see the geopolitical taper at work, consider President Obama's comment Wednesday on the horrific killings of protesters in the Ukrainian capital, Kiev. The president said: "There will be consequences if people step over the line."
No one took that warning seriously—Ukrainian government snipers kept on killing people in Independence Square regardless. The world remembers the red line that Mr. Obama once drew over the use of chemical weapons in Syria . . . and then ignored once the line had been crossed. The compromise deal reached on Friday in Ukraine calling for early elections and a coalition government may or may not spell the end of the crisis. In any case, the negotiations were conducted without concern for Mr. Obama.
The origins of America's geopolitical taper as a strategy can be traced to the confused foreign-policy decisions of the president's first term. The easy part to understand was that Mr. Obama wanted out of Iraq and to leave behind the minimum of U.S. commitments. Less easy to understand was his policy in Afghanistan. After an internal administration struggle, the result in 2009 was a classic bureaucratic compromise: There was a "surge" of additional troops, accompanied by a commitment to begin withdrawing before the last of these troops had even arrived.
Having passively watched when the Iranian people rose up against their theocratic rulers beginning in 2009, the president was caught off balance by the misnamed "Arab Spring." The vague blandishments of his Cairo speech that year offered no hint of how he would respond when crowds thronged Tahrir Square in 2011 calling for the ouster of a longtime U.S. ally, the Egyptian dictator Hosni Mubarak.
Mr. Obama backed the government led by Mohammed Morsi,after the Muslim Brotherhood won the 2012 elections. Then the president backed the military coup against Mr. Morsi last year. On Libya, Mr. Obama took a back seat in an international effort to oust Moammar Gadhafi in 2011, but was apparently not in the vehicle at all when the American mission at Benghazi came under fatal attack in 2012.
Syria has been one of the great fiascos of post-World War II American foreign policy. When President Obama might have intervened effectively, he hesitated. When he did intervene, it was ineffectual. The Free Syrian Army of rebels fighting against the regime of Bashar Assad has not been given sufficient assistance to hold together, much less to defeat the forces loyal to Assad. The president's non-threat to launch airstrikes—ifCongress agreed—handed the initiative to Russia. Last year's Russian-brokered agreement to get Assad to hand over his chemical weapons is being honored only in the breach, as Secretary of State John Kerry admitted last week.
The result of this U.S. inaction is a disaster. At a minimum, 130,000 Syrian civilians have been killed and nine million driven from their homes by forces loyal to the tyrant. At least 11,000 people have been tortured to death. Hundreds of thousands are besieged, their supplies of food and medicine cut off, as bombs and shells rain down.
Worse, the Syrian civil war has escalated into a sectarian proxy war between Sunni and Shiite Muslims, with jihadist groups such as the Islamic State of Iraq and Syria and the Nusra Front fighting against Assad, while the Shiite Hezbollah and the Iranian Quds Force fight for him. Meanwhile, a flood of refugees from Syria and the free movement of militants is helping to destabilize neighboring states like Lebanon, Jordan and Iraq. The situation in Iraq is especially dire. Violence is escalating, especially in Anbar province. According to Iraq Body Count, a British-based nongovernmental organization, 9,475 Iraqi civilians were killed in 2013, compared with 10,130 in 2008.
The scale of the strategic U.S. failure is best seen in the statistics for total fatalities in the region the Bush administration called the "Greater Middle East"—essentially the swath of mainly Muslim countries stretching from Morocco to Pakistan. In 2013, according to the International Institute of Strategic Studies, more than 75,000 people died as a result of armed conflict in this region or as a result of terrorism originating there, the highest number since the IISS Armed Conflict database began in 1998. Back then, the Greater Middle East accounted for 38% of conflict-related deaths in the world; last year it was 78%.
Mr. Obama's supporters like nothing better than to portray him as the peacemaker to George W. Bush's warmonger. But it is now almost certain that more people have died violent deaths in the Greater Middle East during this presidency than during the last one.
In a January interview with the New Yorker magazine, the president said something truly stunning. "I don't really even need George Kennan right now," he asserted, referring to the late American diplomat and historian whose insights informed the foreign policy of presidents from Franklin Roosevelt on. Yet what Mr. Obama went on to say about his self-assembled strategy for the Middle East makes it clear that a George Kennan is exactly what he needs: someone with the regional expertise and experience to craft a credible strategy for the U.S., as Kennan did when he proposed the "containment" of the Soviet Union in the late 1940s.
So what exactly is the president's strategy? "It would be profoundly in the interest of citizens throughout the region if Sunnis and Shiites weren't intent on killing each other," the president explained in the New Yorker. "And although it would not solve the entire problem, if we were able to get Iran to operate in a responsible fashion . . . you could see an equilibrium developing between Sunni, or predominantly Sunni, Gulf states and Iran."
Moreover, he continued, if only "the Palestinian issue" could be "unwound," then another "new equilibrium" could be created, allowing Israel to "enter into even an informal alliance with at least normalized diplomatic relations" with the Sunni states. The president has evidently been reading up about international relations and has reached the chapter on the "balance of power." The trouble with his analysis is that it does not explain why any of the interested parties should sign up for his balancing act.
As Nixon-era Secretary of State Henry Kissinger argued more than half a century ago in his book "A World Restored," balance is not a naturally occurring phenomenon. "The balance of power only limits the scope of aggression but does not prevent it," Dr. Kissinger wrote. "The balance of power is the classic expression of the lesson of history that no order is safe without physical safeguards against aggression."
What that implied in the 19th century was that Britain was the "balancer"—the superpower that retained the option to intervene in Europe to preserve balance. The problem with the current U.S. geopolitical taper is that President Obama is not willing to play that role in the Middle East today. In his ignominious call to inaction on Syria in September, he explicitly said it: "America is not the world's policeman."
But balance without an enforcer is almost inconceivable. Iran remains a revolutionary power; it has no serious intention of giving up its nuclear-arms program; the talks in Vienna are a sham. Both sides in the escalating regional "Clash of Sects"—Shiite and Sunni—have an incentive to increase their aggression because they see hegemony in a post-American Middle East as an attainable goal.
The geopolitical taper is a multifaceted phenomenon. For domestic political as well as fiscal reasons, this administration is presiding over deep cuts in military spending. No doubt the Pentagon's budget is in many respects bloated. But, as Philip Zelikow has recently argued, the cuts are taking place without any clear agreement on what the country's future military needs are.
Thus far, the U.S. "pivot" from the Middle East to the Asia Pacific region, announced in 2012, is the nearest this administration has come to a grand strategy. But such a shift of resources makes no sense if it leaves the former region ablaze and merely adds to tension in the latter. A serious strategy would surely make some attempt to establish linkage between the Far East and the Middle East. It is the Chinese, not the Americans, who are becoming increasingly dependent on Middle Eastern oil. Yet all the pivot achieved was to arouse suspicion in Beijing that some kind of "containment" of China is being contemplated.
Maybe, on reflection, it is not a Kennan that Mr. Obama needs, but a Kissinger. "The attainment of peace is not as easy as the desire for it," Dr. Kissinger once observed. "Those ages which in retrospect seem most peaceful were least in search of peace. Those whose quest for it seems unending appear least able to achieve tranquillity. Whenever peace—conceived as the avoidance of war—has been the primary objective . . . the international system has been at the mercy of [its] most ruthless member."
Those are words this president, at a time when there is much ruthlessness abroad in the world, would do well to ponder.
Mr. Ferguson is a history professor at Harvard and a senior fellow at Stanford University's Hoover Institution. His most recent book is "The Great Degeneration" (Penguin Press, 2013).
For much of the last decade, Mexico and Brazil were a study in contrasts. "Brazil Takes Off" was a typical magazine cover, depicting Rio's huge statue of Christ literally blasting off. The equivalent story for Mexico was "The War Next Door: Why Mexico's Drug Violence is America's Problem Too."
In the past two years, however, the roles have been reversed. Riots in São Paulo and the downfall of billionaire Eike Batista have badly dented Brazil's glamorous image. Meanwhile, a succession of bold moves by Mexico's charismatic new president, Enrique Peña Nieto, have finally awakened foreign observers to the fact that Mexico is Latin America's new "country of the future."
Not only is Mexico's per capita GDP back above Brazil's, according to International Monetary Fund data, but over the past five years investors in the Mexican stock market have enjoyed nearly three times the returns of those who put their money into much-hyped Brazilian equities. Jobs are being created so fast in Mexico—more than two million since early 2010—that the problem of illegal immigration to the United States may soon be history.
In the 1980s and 1990s, Mexico was almost as well known for its financial crises as for its drug wars. Those days are gone. Although growth has been sluggish this year, thanks in large part to the troubles of the construction sector, the IMF predicts a rapid rebound between 2014 and 2018.
The catalyst for Mexican economic change has been political. In 2000, after 70 years of such complete dominance that Mario Vargas Llosa labeled it "the perfect dictatorship," the Institutional Revolutionary Party (PRI) lost power in free elections. Two successive center-right administrations under the National Action Party, or PAN, struggled to deliver the kind of radical changes that Mexico required. Instead, after a dozen long years in the political wilderness, the PRI renewed itself. In July 2012, it returned to power thanks to a highly effective campaign by Mr. Peña Nieto, the youthful former governor of Mexico State.
The democratic world today is so lacking in Mr. Peña Nieto's kind of strategic leadership that the visitor is rather taken aback to encounter it. The day after his inauguration, President Peña Nieto signed the so-called "Pact for Mexico," a framework pre-committing the PRI and its opponents—the PAN and the left-wing Party of Democratic Revolution (Partido de la Revolución Democrática)—to support key reforms in telecommunications, education and finance. It was a bold move, reminiscent of the 1977 Moncloa Pacts, which were the basis for Spain's transformation from Francoist pariah to integrated European democracy.
Then came a succession of confident initiatives. In February, the government arrested the teachers union leader, Elba Esther Gordillo, for alleged embezzlement. Most Mexicans had thought Ms. Gordillo—notorious for her French couture and villas in southern California—was untouchable. The final education reform bill, passed in September, was a still bigger blow against her union, creating independent teacher training institutes to replace the union-controlled university that had trained educators. The reform introduces performance testing to evaluate teachers and increases funding for new schools and learning centers.
The government also passed a telecom reform that most observers thought would never happen. The law boosts competition by encouraging new entrants to the telecom market with the ultimate goal of lowering prices for users. Raising income taxes on higher earners, as the new fiscal package does, is not too popular in the business community. Yet, it is politically smart for Mexico to invest in education and transportation infrastructure, while at the same time making the tax system more progressive.
Thanks to the "Pact for Mexico," the budget for 2014 easily passed last month. No government shutdown, no debt-ceiling drama (public debt is just 38% of GDP)—just agreement on the essential priorities.
Instead of compromising the independence of the central bank, as in Argentina or Venezuela, the Peña Nieto administration has diligently followed the recommendations of the Banco de Mexico to introduce deep structural reforms from education to antitrust laws. The government understands that only with consistently low inflation can the central bank keep interest rates low. In Mexico there is no wishful thinking that easy money could somehow substitute for real reform.
The most important project, however, is the liberalization of the energy industry, long held back by the state-owned Pemex monopoly. The same party that nationalized the country's oil fields 75 years ago is now embarking on a reform whose primary objective is to bring foreign capital and expertise back in. The PRI understands that only with outside assistance can the country develop its extensive shale resources and deep-water oil reserves. Many thought this reform would not pass, but the government delivered it ahead of schedule on Dec. 12.
Modern technology will take time to install. But thanks to the North American Free Trade Agreement—the fierce critics of which have gone silent—cheap U.S. natural gas will soon be flowing down north-to-south pipelines. This will make Mexican industry, which is already beating China on labor costs, even more competitive. That will in turn support a growing Mexican middle class.
The government has not lost sight of income inequality and low productivity. But Mr. Peña Nieto's key insight is that attacking the mere symptoms of economic underdevelopment is not the answer. It is rare indeed to witness a president talking about "raising family incomes for all Mexican families through elevating and democratizing productivity," as Mr. Peña Nieto said during his state of the union in September. If social ills like drug violence stem from a lack of opportunities, then successful economic reforms should reduce them. Almost all measures of violence have fallen during Mr. Peña Nieto's first year of government.
Even in a lousy year for emerging markets, Mexico has future prospects that are the brightest in the region. Under the revitalized PRI, the country is on its way to a new kind of institutional revolution: one that could permanently transform it from Latin America's laggard into North America's new engine of growth.
Mr. Barbieri is a former fellow at Harvard University's Belfer Center for Science and International Affairs. Mr. Ferguson is a professor of history at Harvard.
It is politics that explains why, according to the Congressional Budget Office, the federal government will likely run a deficit every year from now until 2038. It is politics that explains why President Obama and Congress have been unable to agree on the reforms of taxation and entitlements that are so manifestly needed. And it is politics that explains why, before too long, Washington insiders will be back to the usual brinkmanship over government funding and borrowing.
Most economists would agree that the politicization of monetary policy has undesirable consequences, like pre-election rate cuts and high inflation. Hence independent central banks. Yet there is no chance whatever of legislatures giving up control of the budgetary process to independent fiscal technocrats. So are there any alternatives? The obvious one is to enact budgets for longer than a single year.
This idea is not without precedent. A recent example of a multiyear budget comes from Israel, where one of us served as finance minister. The biennial budget approved in July 2009 (for the years 2009-10) was the first two-year budget in Israel’s history, and it was followed by biennial budgets for 2011-12 and 2013-14. Although Israel is going back to annual budgets in 2015, other democracies that have experimented with two-year budgets include Hungary and Spain. And a number of other states — including Austria, Canada and Slovenia — have moved toward rolling budgets, presenting two annual budgets at a time.
The idea has American precedents. In 1940, 44 states enacted biennial budgets. Today, however, only 20 do. And, while the idea of two- or three-year federal budgets has been floated many times in Washington, it has never made it to the statute books.
The principal arguments against multiyear budgets are, a) that they reduce the flexibility of fiscal policy in the event of sudden macroeconomic changes, b) that they rely on forecasts up to 30 months ahead, which are even less dependable than those for the next 12-18 months and, c) that, precisely for these reasons, two-year budgets would end up being revised after a year anyway.
Moreover, any legislature that reduces the frequency with which it tugs the purse strings loses power to the executive. That’s why Bismarck insisted on a seven-year military budget, to reduce the democratically elected Reichstag’s power over an army dominated by the Prussian aristocracy.
Yet longer-term budgets have important advantages. They reduce uncertainty for the ministries, agencies and private companies that depend on government funds. Public investment in infrastructure is a good example; so are defense contracts. In each case, long-term engagements need to be made with contractors and the results take years to materialize. But the danger always exists of unexpected budget cuts that terminate unfinished projects at high cost to all concerned.
A more subtle advantage of longer-term budgets derives from the argument of the Nobel laureates Finn Kydland and Edward Prescott that rules are often preferable to discretion in the realm of economic policy. A good example is investment in fixed assets. A short-sighted government might be tempted to set low taxes on business to encourage investment, but then raise them on installed capital after the fact. But investors who suspected such “time inconsistency” would simply not invest. Thus, a rule that bound a government from raising the tax rate on past investments would lead to higher investment.
Today, there is reason to believe that many Americans, contemplating the vast liabilities of the federal government, expect higher taxes and lower post-retirement entitlements. The rational response is to reduce consumption.
One of the main defects of the 2009 stimulus bill was that it was not accompanied by any credible plan to restore the federal budget to balance within, say, 10 years. If people had been more confident about future policy, they might have been more ready to spend rather than simply save their stimulus-generated dollars. While a direct causal link has yet to be established, in Israel the implementation of biennial budgets amid the global crisis was followed by an impressive 36 percent increase in fixed investment in the years 2010-12.
Longer-term budgets also have political advantages. Passing a budget in the United States, as in Israel, involves prolonged talks between the executive and legislative branches. True, this process is at the heart of democracy. Nothing connects a congressman to his constituents more than a vote on a tax hike or a spending cut. But does the horse-trading need to happen on an annual basis?
With annual budgets, much of the year is devoted to budget preparation. No sooner is the process over than it has to begin again. This treadmill leaves little time for ambitious structural reforms, or for legislators to scrutinize how public money is actually spent. In what other arena does budgeting so completely dominate implementation?
Economics is a world of double standards. For nearly two decades, the World Bank and the International Monetary Fund have recommended that developing countries adopt Medium Term Expenditure Frameworks. Yet this is not expected of developed economies, even though it is the United States, Japan and European countries that have the world’s biggest public debts.
America’s fiscal problems will not be solved without some bipartisan agreement. Biennial budgets might just be the place to start. After all, this is an idea that was supported not just by Ronald Reagan and both Bushes, but also by Bill Clinton, Al Gore (leader in 1993 of the National Performance Review) and the current Treasury secretary, Jacob Lew.
Moreover, Israel’s experience has been a great advertisement. Not only did it enjoy an impressively rapid recovery from the financial crisis under the system of biennial budgets; more remarkably, when directors-general of Israel’s government ministries were polled in 2010, not one of them favored returning to what one called “the Dark Ages and the madness of the single-year budget.”
Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University. Yuval Steinitz is the Israeli intelligence minister and a former finance minister.
Nearly seven years have passed since we coined the word Chimerica in these pages to characterize the symbiotic relationship between China and America. Few today would dispute that op-ed's original point: that the unbalanced economic relationship between China and America posed a threat to global financial stability. Without the flow of Chinese savings into U.S. dollars, as a result of Beijing's large-scale currency intervention and reserve accumulation, American interest rates would surely have been higher and the housing bubble would have inflated less.
Much has happened since 2007 to shake up both players. But just as the global financial crisis had its origins in Chimerica, now the durability of the world's recovery also depends on that relationship.
Before the 2008 financial crisis, this was a marriage of opposites. China saved, exported and lent. America consumed, imported and borrowed. For a few heady years, the odd couple were happy together. Not only did the Chinese savings "glut" lower the cost of capital; the glut of Chinese workers also reduced the cost of labor. Small wonder nearly every asset class on the planet rallied.
As we predicted, however, Chimerica was a chimera. By the end of 2008, as the shock waves of the American property crash and banking crisis reverberated around the world, the marriage was on the rocks. With U.S. unemployment at 10% and Chinese growth at 10%, it no longer looked a very equitable arrangement. The Americans came close to accusing the Chinese of currency manipulation. The Chinese did accuse the U.S. of reckless fiscal and monetary policies.
Yet the Chimerican misalliance has somehow survived, and even prospered. In 1993, the combined GDP of China and the U.S. was equivalent to 28% of the world economy (on a purchasing-power parity basis). This year, according to the International Monetary Fund, the share will be 35%. Talk of currency manipulation has more or less ceased in Washington—hardly a surprise, since the Chinese currency has appreciated on a trade-weighted basis by 25% since 2007.
True, Chinese commentators condemned the recent political shenanigans in Washington. But who could really blame foreign holders of U.S. Treasurys for grumbling when American politicians seemed ready to use default as a weapon in their partisan feuds?
So what brought about this swift reconciliation between the nearly estranged partners? The answer is that, like any couple who spend long enough in each other's company, the Chimericans have become rather alike.
Initially, both countries responded to the shock of the financial crisis with powerful self-medication: ultralow interest rates and quantitative easing here, runaway state-controlled credit creation there.
As American households struggled to adjust their balance sheets, the Fed sought to help first by slashing short-term interest rates to zero and then by holding long rates down with quantitative easing. Chinese producers, meanwhile, had to turn inward for new customers as Western demand slumped. Government-controlled banks obliged by unleashing a credit boom of historical proportions. Between 2009 and 2012, the Chinese credit-to-GDP ratio rose by no less than 69% of GDP. In the five years since the crisis, China created more than 70 trillion renminbi in new credit, equivalent to more than the combined annual GDP of Germany and Japan.
Now, both countries confront surprisingly similar challenges. Both economies suffer from a severe debt overhang and have become addicted to ultra-loose financial conditions. Both know the medication cannot continue forever. But neither Washington nor Beijing knows how to reduce the dose, much less to quit.
The summer saw moments of truth on both sides of the Pacific. The leadership in Beijing consciously set out to rein in credit: There was talk of "hard budget constraints" and even of an engineered financial crisis. Yet then interbank rates in the Shanghai market soared close to 30% after a 15 billion renminbi bond auction missed its target. Total social financing has increased by close to 4 trillion renminbi since July.
The Fed also blinked. On May 22, Ben Bernanke announced that the Fed might "take a step down in our pace of asset purchases." But when long-term interest rates rose over the summer by about 100 basis points in anticipation of the beginning of the end of QE, it was the same story as in Beijing. In September the Federal Reserve Open Market Committee unexpectedly postponed the pre-announced "taper" of asset purchases. In the face of weaker economic data, fiscal brinkmanship on Capitol Hill, and the nomination of Janet Yellen to succeed Mr. Bernanke at the helm of the Fed, the taper itself has tapered.
"They tried to make me go to rehab," sang the late Amy Winehouse, back before the crisis. "I said, 'no, no, no.' " This is now the unofficial anthem of Chimerica.
For some economists, the right time to tighten monetary policy is always never. But there are dangers in procrastination. Having blinked once, both the Fed and the PBOC may soon have a credibility problem. The longer they wait, the frothier asset markets become (stocks in the U.S. and big city housing in China are both up around 20% this year). That may perhaps advance recovery through the "portfolio channel"; it also advances inequality by favoring those with the biggest portfolios. And enriching the rich is not the stated policy objective of either the American Democratic Party or the Chinese Communist Party.
Meanwhile, the more monetary policy is regarded as "the only game in town," the less pressure there is on politicians to think seriously about either fiscal or structural reforms. Finally, if monetary policy is too loose for too long, history suggests it can increase the probability of a disorderly asset-price crash. It is not hard to imagine such a scenario in a China that has acquired American levels of leverage, plus a bunch of shaky shadow banks.
With Europe emerging only slowly from the euro's near-death experience, the rest of the world must watch nervously to see what policy makers in Washington and Beijing decide to do. One thing is already clear from the wobble in global bond markets this summer, which exposed the vulnerability of emerging markets with large current account deficits: If Beijing and Washington try to exit at the same time, the global economy could take a big hit.
Coordination and sequencing are therefore essential. These will become all the more vital if China's leaders are in earnest—as is rumored in Beijing ahead of this month's Third Plenum—about liberalizing their financial sector and capital account, steps that can only increase Sino-American economic interdependence. The Chimerican couple need to go to rehab soon—but separately.
Mr. Ferguson is a professor of history at Harvard University. Mr. Schularick is a professor of economics at the University of Bonn.