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10 Leaders The Economist January 2nd 2010 2 ing countries, can take eect outside the UN process. That could mark a new pluralism in climate politics, allowing coalitions of the willing to form for specic purposessuch as slowing deforestation, or stemming emissions from shipping. There are risks to slicing up the problem into smaller pieces. Bundling everything together, so that all parties need to oer some give in order to get their take, is a time-honoured format for negotiations; and stepping back from doing everything in one forum may mean doing less overall. But the world has twice, at Kyoto and at Copenhagen, tried to deal with the problem in one go, and failed. Smaller groups such as the G20 or the Major Economies Forum oer a better prospect for haggling over dicult issues. The UN process still has a role, in ensuring a workable and trusted system of accounting for car- Japan’s two lost decades An end to the Japanese lesson EW Year rally expected Non Tokyo market next week. That was a typically boosterish Japanese newswire headline on December 29th 1989, the day that one of the world’s biggest ever asset-price bubbles reached bursting point. Exactly 20 years later the Japanese are still paying the price for such hubris (see page 52). The Nikkei 225 index, which peaked at 38,916, now languishes at just over one-quarter of that level (though once again there is talk of a New Year rally). Japan’s economy has barely grown in nominal terms after two lost decades, and is again suering from deation. Where Japan was once bearing down on America, it now feels the hot breath of China on its neck. Remember Japan as Number One? These days the country’s chief claim to fame is having a gross government debt burden approaching 200% of GDP. For the Japanese this has all been deeply troubling. But in the past two years, as the Western world has faced many of the same problems that Japan has been grappling with since 1989 (the collapse of asset prices, a surge in distressed debt and a looming threat of deation), Japan has provided some useful lessons on how governments should, and should not, tackle potentially systemic nancial meltdowns. Thanks to the precedent set by Japan, many of these lessons were quickly put into practice. Acting far more swiftly than the Japanese authorities did (the Japanese had the misfortune of having to learn through trial and error), Western policymakers provided liquidity to their banks and forced them to rebuild capital, while pumping in generous doses of scal stimulus to oset the collapse in private-sector demand. And like the Bank of Japan, they slashed interest rates and took extraordinary measures to try to keep credit owing. The ecacy of these steps has led to growing optimism about the world economy. So what is the Japanese lesson now? In many ways, the analogy is no longer terribly helpful. That is partly because the pupils are in a worse pickle than the teacher ever was. The most vulnerable countries, such as Greece, now face a risk that Japan never did: that markets will lose faith in their creditwor- bon, and in debating and approving or rejecting agreements whose details will largely be worked out elsewhere. Many problems lie aheadand not just as a result of Copenhagen’s failures. The main danger lies in the American Senate, which at some point over the next few months will decide whether to approve or reject legislation to set up a capand-trade system to put a price on carbon. That will have more impact than any international conference, including Copenhagen, on the future levels of greenhouse-gas emissions. But global negotiations will need to continueand the participants need to learn one useful lesson from Copenhagen. Climate change is too big a problem to be swallowed in a single bite. Smaller groups, dealing with more manageable-sized chunks, have a better chance. 7 Japan has taught the world a great deal about coping with the nancial crisis. Now the West is on its own thiness. Japan, for all its woes, has beneted from a huge pool of domestic savings and investors happier to keep their money at home than abroad. Meanwhile, the scale of the global upheaval makes Japan’s problems, which had little impact overseas and took place against a backdrop of global growth, look small by comparison. And with huge decits in so many nations, the risk of a sudden loss of scal credibility is more acute than it ever was in Japan. But there are other ways in which the pupils are in better shape. That is partly because they have less rigid systems. In the more adaptable Western economies there has been less resistance to structural changes in order to maintain productivity. There are also usually fewer political barriers to dealing with bad private-sector debts than there were in Japan. Moreover Westerners are also reaping the rewards of having acted more decisively than the Japanese didespecially when it came to pumping money into the economy and cleaning up nancial balance-sheets. With fewer zombie banks, fewer signs of entrenched deation and much earlier signs of growth, the West is in uncharted territory: it has arguably already got to a stage that Japan never really did. Nothing more will I teach you today That makes it very dicult to keep on drawing particular lessons from Japan’s sad plight. It does, however, still leave a general lesson common to all economic disasters: don’t be suckered by false signs of economic recovery. In Japan’s case, such hopes have led it repeatedly to tighten scal policy before private demand was strong enough to sustain a recovery. That entrenched deation. Japan also left its banks too short of capital to cope with subsequent shocks. Policymakers in the developed world still have an enormous task on their hands. Many banks have huge writedowns to make on their loans, economies are burdened with excess capacity and households’ debt levels remain high. It would be disastrous to tighten policy too soon, as Japan’s example shows. But Japan provides no useful guidance on when the right time would be. For that, there is only trial and error. And the more errors there are, the more the West’s next decade may look like Japan’s two lost ones. 7
Letters Carbon tax or trade? SIR The Economist continues to propagate the myth that a carbon tax is preferable to carbon trading (Stopping climate change, December 5th). There are three good reasons for not favouring a carbon tax over a cap-andtrade solution. First, a one size ts all tax requires an impossible calculation of the average cost of reducing emissions over a given period of time. Compare this with an emissions-trading system that works on the free-oating marginal cost of abating emissions. Second, carbon taxes would be levied locally and so impossible to properly administer on a global scale. A global carbonmarket price is perfectly pervasive. And third, taxation cannot guarantee a reduction in greenhouse-gas emissions; emitters could opt to pay the tax and continue emitting at will. Conversely, a cap-andtrade solution introduces a carbon ceiling and the price acts as no more than a useful barometer of how close we are to achieving that goal; prices will tend to zero as the requisite level of emission reductions is achieved. The latter point dispels the political myth that we need to establish a carbon price. Why does it matter if we achieve the necessary quantity of emission abatement at $2 per tonne of CO2 or at $50 per tonne? Our objective ought to be to achieve the environmental goal at the lowest unit cost. This goal can only be accomplished through the exibility of emissions trading. The carbon-tax argument is as extinct as the dinosaurs. James Emanuel Commercial director CantorCO2e London SIR You asserted that, economists prefer carbon prices, especially those set by taxes rather than cap-and-trade systems, which are more vulnerable to capture by the polluters. This implies that someone has actually polled economists on the question, or counted pro and con arguments in the environmentaleconomics literature, or at least made some eort to ascertain what economists prefer. Those assumptions would be wrong, as there is still plenty of disagreement on carbon pricing versus cap and trade. Your only argument for dismissing cap and trade is its supposedly greater vulnerability to capture. That in itself is doubtful. Consider an important, and not doubtful, argument on the other side. Finding the correct price, or tax, on carbon emissions requires huge amounts of detailed knowledge of the processes behind the emissions and the marginal costs faced by polluters. It is not possible to appeal to trial and error for establishing the right price because of the lags and the ineciencies implied by the inevitable errors. The great virtue of cap and trade is that the system can be taken directly to the targeted emission reductions. The price that arises out of the market, then, is by denition the correct one. Clifford Russell Professor emeritus of economics Vanderbilt University Nashville, Tennessee SIR You have published a special report on climate change (December 5th) that is pivoted on the apparent acceptance of projections based on data that neither you nor I have been allowed to see or question openly. It is sad to see the newspaper that I have held in such high esteem blindly prostitute itself to the warmistbrigade consensus on alleged man-made climate change. Be brave like the small child who saw and said that the emperor was wearing no clothes. Carl Thuey Tunbridge Wells, Kent SIR It is important to keep the debate on climate change alive, so both sides should be grateful for each other. We could learn a lesson from the lm, 12 Angry Men. Henry Fonda’s lone sceptic holds rm against 11angry jurors to prevent a possibly wrongful conviction. He does this by focusing on the evidence and not making personal attacks. Each side of the debate on global warming would do well to consider how they measure up to this standard. Benjamin de Foy Assistant professor Department of earth and atmospheric sciences Saint Louis University St Louis, Missouri Valued workers SIR That you regard publicsector workers to be coddled and spoiled rotten because of their health-care benets and pensions says more about you than the workers (Welcome to the real world, December 12th). You even distorted the evidence, claiming that public employees earn more than those in the private sector. As the Bureau of Labour Statistics makes clear, when comparing pay within occupations public employees do not receive more than their counterparts in the corporate world. We believe that all American workers deserve decent health care and a secure retirement. The decline of unions in the private sector is one reason why those benets are not shared by more families. Contrary to what you might think, it is not government employees who brought the American economy and state and local budgets to the brink of disaster. Rather than attack public employees for negotiating good contracts, we should expand the ability of all workers to bargain for better wages and benets so that they and their families can share in the American Dream. Gerald McEntee President American Federation of State, County and Municipal Employees Washington, DC Britain’s got talent SIR Bagehot made the point that ‘Good luck to him’ was once a characteristic British attitude to self-made wealth (December 12th). Unlike you, I believe it still is. What riles the British is wealth made through inherited or institutional privilege, monopoly, manipu- The Economist January 2nd 2010 11 lation of regulation, consumer rip-os, and, as in bankers’ bonuses, gambling with other people’s money, losing, being rescued by the taxpayer, having no bloody gratitude and expecting to start the whole scandalous round all over again. I believe that Britons have as much regard, admiration and absence of jealousy as they ever did for entrepreneurs who succeed through talent or a bright idea exploited through sheer hard work. We also like (though we might be jealous of) a truly lucky winner like a lottery millionaire and admire (though we might think them cocky) a successful TV talentshow contestant who has the guts to run the gauntlet of judges and audience. Baroness Sarah Ludford, MEP London String symphony SIR Italian violin-makers were not the sole master craftsmen of the art during the 18th century (Older and richer, December 19th). Around 1715 Daniel Parker, an English violin-maker working in London, visited Stradivari’s Cremona workshop, where he acquired an abundance of the master’s secrets, such as the ingredients used to varnish the instrument, wood-ageing and carving techniques, which were unknown to the outside world. Upon returning to London, Parker produced instruments with so gorgeous a tone that when Fritz Kreisler performed on his Daniel Parker violin two centuries later, no one in the audience, not even violinmakers or music critics, could believe that he was not playing his own Strad. Les Dreyer Retired violinist of the Metropolitan Opera orchestra New York 7 Letters are welcome and should be addressed to the Editor at The Economist, 25 St James’s Street, London sw1A 1hg E-mail: letters@economist.com Fax: 020 7839 4092 More letters are available at: Economist.com/letters
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Page 4 and 5: 4 Contents The Economist January 2n
Page 6 and 7: THANK YOU FOR MAKING US THE WORLD
Page 8 and 9: 8 Leaders The Economist January 2nd
Page 12 and 13: Online The year ahead In anticipati
Page 14 and 15: 14 Executive Focus INTERNATIONAL TR
Page 16 and 17: 16 Executive Focus Board of Directo
Page 18 and 19: 18 Brieng Waziristan The Economist
Page 20 and 21: 20 Brieng Waziristan The Economist
Page 22 and 23: 22 United States The Economist Janu
Page 24 and 25: 24 United States The Economist Janu
Page 26 and 27: 26 Brieng Emerging markets and rece
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Page 30 and 31: 30 The Americas The Economist Janua
Page 32 and 33: 32 Asia The Economist January 2nd 2
Page 34 and 35: Middle East and Africa 34 The Econo
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Page 38 and 39: 38 Europe The Economist January 2nd
Page 40 and 41: Britain 40 The Economist January 2n
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Page 44 and 45: 44 International The Economist Janu
Page 46 and 47: 46 Business The Economist January 2
Page 48 and 49: 48 Business The Economist January 2
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Page 52 and 53: Finance and economics 52 The Econom
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Page 56 and 57: Brieng Mobile-phone culture 56 The
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60 Science and technology The Econo
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Books and arts 62 The Economist Jan
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64 Books and arts The Economist Jan
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66 Courses Announcements The Econom
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68 Tenders THE MINISTRY OF TOURISM
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70 Economic and nancial indicators
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