Kemal Dervis and Karim Foda write: Over the last few decades, oil prices have fluctuated widely – ranging from $10 to $140 a barrel – posing a challenge to producers and consumers alike. For policymakers, however, these fluctuations present an opportunity to advance the key global objectives – reflected in the Sustainable Development Goals adopted last September and the climate agreement reached in Paris in December – of mitigating climate change and building a more sustainable economy.

Recent oil-price fluctuations resemble the classic cobweb model of microeconomic theory. High prices spur increased investment in oil. But, given long lags between exploration and exploitation, by the time the new output capacity actually comes on stream, substitution has already taken place, and demand often no longer justifies the available supply. At that point, prices fall, and exploration and investment decline as well, including for oil substitutes. When new shortages develop, prices begin rising again, and the cycle repeats.

The cycle will continue, though other factors – such as the steadily declining costs of renewable energy and the shift toward less energy-intensive production processes – mean that it will probably spin within a lower range. In any case, a price increase is inevitable.

Against this background, today’s very low prices – below $35 a barrel at times since the beginning of this year – create a golden opportunity (which one of the authors has been recommending for over a year) to implement a variable carbon tax. The idea is simple: The tax would decrease gradually as oil prices rise, and then increase again when prices eventually come back down.

If the adjustments are asymmetric – larger increases when prices fall, and smaller decreases when prices rise – this system would gradually raise the overall carbon tax, even as it follows a counter-cyclical pattern. Such an incremental increase is what most models for controlling climate change call for.

Consider this scenario. Imagine that in December 2014, policymakers introduced a tax of $100 per metric ton of carbon (equivalent to a $27 tax on CO₂). For American consumers, the immediate impact of this new tax – assuming its costs were passed fully onto consumers – would have been a $0.24 increase in the average national price of a gallon of gasoline, from $2.23 to $2.47, still far below the highs of 2007 and 2008.

If, since then, each $5 increase in the oil price brought a $30 per ton decrease in the carbon tax, and each $5 decline brought a $45-per-ton increase, the result would be a $0.91 difference between the standard market price and the actual tax-inclusive consumer price last month [see figure]. That increase would have raised the carbon price substantially, providing governments with revenue – reaching $375 per ton of carbon today – to apply to meeting fiscal priorities, all while cushioning the fall in gasoline prices caused by the steep decline in the price of crude. While $375 per ton is a very high price, reflecting the particularly low price of oil today, even a lower carbon price – in the range of $150-250 per ton – would be sufficient to meet international climate goals over the next decade.

With this approach, policymakers could use the market to help propel their economies away from dependence on fossil fuels, redistributing producer surplus (profits) from oil producers to the treasuries of importing countries, without placing too large or sudden a burden on consumers. In fact, by stabilizing user costs, it would offer significant gains.

The key to this strategy’s political feasibility is to launch it while prices are very low. Once it is in place, it will become a little-noticed, politically uncontroversial part of pricing for gasoline (and other products) – one that produces far-reaching benefits. Some of the revenue could be returned to the public in the form of tax cuts or research support.

Despite the obvious benefits of a variable carbon tax, no country has capitalized on today’s low oil prices to raise carbon prices in this or a similar form, though US President Barack Obama’s call for a tax on oil suggests that he recognizes the opening low prices represent. This should change. The opportunity to implement a policy that is simultaneously sensible, flexible, gentle, and effective in advancing national and global goals does not arise very often. Policymakers must seize it when it does. The time for a variable stabilizing carbon tax is now.

Gareth Evans writes:  One of the most bizarre arguments made by the people who support Britain’s exit from the European Union is the notion that a self-exiled UK will find a new global relevance, and indeed leadership role, as the center of the “Anglosphere.”

The idea is that there are a group of countries – with the “Five Eyes” intelligence-sharing community of the US, UK, Australia, Canada and New Zealand at its core – who share so much of a common heritage that they can be a new, united force for global peace and prosperity.

Geostrategically, the main game is, as it has been for most of recorded time, geography rather than history, and the biggest game of all for the foreseeable future is the emerging contest for global supremacy between the US and China.

The US does value highly its relationship with NATO members Britain and Canada.  Yet it is hard to see US leaders devoting time and energy to attending Commonwealth Heads of Government meetings, which is essentially what any formal Anglosphere structure would amount to.

Australia, for its part, sees its security future as wholly bound up in the Indo-Pacific region. Anglosphere connections mattered a lot for Australians and others in the days before the UK joined the European Common Market. The severance of those ties was painful for our dairy and other industries, but for Britain hard-headed self-interest understandably prevailed. Self-interest now prevails for the rest of us.

In Australia’s case, our trade future is bound up either with all-embracing global agreements, or at least substantial regional ones like the Trans-Pacific Partnership, with the US the key player, or the Regional Comprehensive Economic Partnership now being negotiated between ASEAN and Australia, China, India, Japan, South Korea and New Zealand.

The US manifestly feels the same way.

Probably the hardest truth that Britain’s Anglosphere dreamers must confront is that there is just no mood politically to build some new global association of the linguistically and culturally righteous.

While many of us living in the so-called Anglosphere remain nostalgic about Britain.  The truth of the matter is that if Britain steps away from Europe, thinking it can compensate by creating an influential new international grouping of its own, it will find itself very lonely indeed.

Moha Ennaji writes:   Morocco’s drive to become a regional renewable-energy powerhouse offers a real option for economic development in other Arab countries.

Morocco has been investing in large-scale renewable-energy projects for some time; but only now are these investments coming online. Perhaps the most impressive is the gigantic Noor-1 solar-energy compound, located in the Moroccan desert near Ouarzazate. Opened on February 4, Noor-1 uses highly advanced technology to store energy for use at night and on cloudy days.

Considered the largest solar power plant in the world, Noor-1 is expected to produce enough energy for more than a million people, with extra power eventually to be exported to Europe and Africa, according to the World Bank. Given that Morocco imports around 97% of its energy supply, and possesses no oil or natural gas deposits of its own, the government has viewed developing renewable energy as the only way to ensure the country’s continuing economic development. This is an insight others in the region should heed.

The Noor-1 project, covering an area of more than 4.5 square kilometers (1.7 square miles) with 500,000 curved mirrors – some as high as 12 meters – cost around $700 million. But it is intended to be only one part of a huge solar compound extending over 30 square kilometers. Indeed, by 2018, three more plants, Noor-II, Noor-III, and Noor-Midelt will be constructed, using a combination of technologies, including thermosolar and photovoltaic. The project will generate up to 2,000 megawatts daily by 2020, helping to reduce the development gap between urban and rural areas.

Of course, the project has demanded huge sums in investment. Of the $9 billion project’s financing, some $1 billion has come from a German investment bank, $400 million from the World Bank, and $596 million from the European Investment Bank. The rest of the funding has come from Morocco’s government as part of its national development strategy.

In the near future, Morocco will also develop a wind program with a capacity of at least 2,000 MW daily, and a 2,000 MW hydropower project. These could provide the country with 42% of its total electricity production. This represents an unparalleled proportion of renewable energy at both the regional and the international levels.

Already, the Tarfaya Wind Farm, positioned on Morocco’s Southern Atlantic Coast, is Africa’s biggest. With 131 turbines and a daily capacity of more than 300 MW, Tarfaya will help reduce Morocco’s carbon dioxide emissions by 900,000 tons annually, and cut the country’s annual oil import bill by more than $190 million.

Morocco’s government is convinced that reform and development will confirm its emergence as a regional leader and gateway to Africa.

Investors are aware of Morocco’s exceptional geographic position and its political stability in a region all too often held back by uncertainty. The country’s giant solar complex and other investments will help boost the country’s energy independence, reduce costs, and expand access to power. Others in Africa and the Middle East should take note.

Dumbisa Moya writes: Over the past decade, income inequality has come to be ranked alongside terrorism, climate change, pandemics, and economic stagnation as one of the most urgent issues on the international policy agenda. And yet, despite all the attention, few potentially effective solutions have been proposed. Identifying the best policies for reducing inequality remains a puzzle.

To understand why the problem confounds policymakers, it is helpful to compare the world’s two largest economies. The United States is a liberal democracy with a market-based economy, in which the factors of production are privately owned. China, by contrast, is governed by a political class that holds democracy in contempt. Its economy – despite decades of pro-market reforms – continues to be defined by heavy state intervention.

But despite their radically different political and economic systems, the two countries have roughly the same level of income inequality. Each country’s Gini coefficient – the most commonly used measure of income equality – is roughly 0.47.

In one important way, however, their situations are very different. In the US, inequality is rapidly worsening. During the same period, inequality in China has been declining.

This poses a challenge for policymakers. Free market capitalism has proved itself to be the best system for driving income growth and creating a large economic surplus. And yet, when it comes to the distribution of income, it performs far less well.

Most democratic societies have attempted to address the problem through left-leaning redistributive policies or right-leaning supply-side approaches.

Adding to the challenges of the policy debate are assertions that inequality is unimportant. If a rising tide is lifting all boats, the thinking goes, it doesn’t matter that some may be rising more slowly than others.

Those who argue for de-emphasizing income inequality maintain that public policy should seek to ensure that all citizens enjoy basic living standards – nutritious food, adequate shelter, quality health care, and modern infrastructure – rather than aiming to narrow the gap between rich and poor. Indeed, some contend that income inequality drives economic growth and that redistributive transfers weaken the incentive to work, in turn depressing productivity, reducing investment, and ultimately harming the wider community.

But societies do not flourish on economic growth alone. They suffer when the poor are unable to see a path toward betterment. Social mobility in the US (and elsewhere) has been declining, undermining faith in the “American Dream.”

Over the past 50 years, as countries such as China and India posted double-digit economic growth, the global Gini coefficient dropped from 0.65 to 0.55. But further headway is unlikely – at least for the foreseeable future.

Economic growth in most emerging economies has slowed below 7%, the threshold needed to double per capita income in a single generation. In many countries, the rate has fallen below the point at which it is likely to make a significant dent in poverty.

This bleak economic outlook has serious consequences. Widening inequality provides fodder for political unrest, as citizens watch their prospects decline.

Globally, the slowdown in economic convergence has similar implications, as richer countries maintain their outsize influence around the world – leading to disaffection and radicalization among the poor. As difficult a puzzle as income inequality may seem today, failing to solve it could lead to far more severe challenges.

Joseph E. Stiglitz and Hamid Rashid write:  Developing countries are bracing for a major slowdown this year. According to the UN report World Economic Situation and Prospects 2016, their growth averaged only 3.8% in 2015 – the lowest rate since the global financial crisis in 2009 and matched in this century only by the recessionary year of 2001. And what is important to bear in mind is that the slowdown in China and the deep recessions in the Russian Federation and Brazil only explain part of the broad falloff in growth.

True, falling demand for natural resources in China (which accounts for nearly half of global demand for base metals) has had a lot to do with the sharp declines in these prices, which have hit many developing and emerging economies in Latin America and Africa hard. Indeed, the UN report lists 29 economies that are likely to be badly affected by China’s slowdown. And the collapse of oil prices by more than 60% since July 2014 has undermined the growth prospects of oil exporters.

The real worry, however, is not just falling commodity prices, but also massive capital outflows. During 2009-2014, developing countries collectively received a net capital inflow of $2.2 trillion, partly owing to quantitative easing in advanced economies, which pushed interest rates there to near zero.

The search for higher yields drove investors and speculators to developing countries, where the inflows increased leverage, propped up equity prices, and in some cases supported a commodity price boom.

But the capital flows are now reversing, turning negative for the first time since 2006, with net outflows from developing countries in 2015 exceeding $600 billion – more than one-quarter of the inflows they received during the previous six years.

This is not the first time that developing countries have faced the challenges of managing pro-cyclical hot capital, but the magnitudes this time are overwhelming.

Of course, the East Asian economies today are better able to withstand such massive outflows, given their accumulation of international reserves since the financial crisis in 1997.

The stockpile of reserves may partly explain why huge outflows have not triggered a full-blown financial crisis in developing countries. But not all countries are so fortunate to have a large arsenal.

Once again, advocates of free mobility for destabilizing short-term capital flows are being proven wrong. Many emerging markets recognized the dangers and tried to reduce capital inflows. South Korea, for example, has been using a series of macro-prudential measures since 2010, aimed at moderating pro-cyclical cross-border banking-sector liabilities. The measures taken were only partially successful, as the data above show. The question is, what should they do now?

Corporate sectors in developing countries, having increased their leverage with capital inflows during the post-2008 period, are particularly vulnerable.

Governments need to take quick action to avoid becoming liable for exposures. Expedited debtor-friendly bankruptcy procedures could ensure quick restructuring and provide a framework for renegotiating debts.

Developing-country governments should also encourage the conversion of such debts to GDP-linked or other types of indexed bonds.

While reserves may provide some cushion for minimizing the adverse effects of capital outflows, in most cases they will not be sufficient.

In some cases, it may be necessary to introduce selective, targeted, and time-bound capital controls to stem outflows, especially outflows through banking channels. This is perhaps the only recourse for many developing countries to avoid a catastrophic financial crisis. It is important that they act soon.

illustrated by Joseph Depczyk

Stephen S. Rach writes:  In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.

The adoption of negative interest rates – initially launched in Europe in 2014 and now embraced in Japan – represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand – primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets. But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation – in effect, urging banks to make new loans regardless of the demand for such funds.

This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.”

Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted GDP growth. It’s also the US, where consumer demand – the epicenter of America’s Great Recession – remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period.

All of this speaks to the impotence of central banks to jump-start aggregate demand in balance-sheet-constrained economies that have fallen into 1930s-style “liquidity traps.”

This could be the greatest failure of modern central banking. Yet denial runs deep. Former Federal Reserve Chair Alan Greenspan’s “mission accomplished” speech in early 2004 is an important case in point. Greenspan took credit for using super-easy monetary policy to clean up the mess after the dot-com bubble burst in 2000, while insisting that the Fed should feel vindicated for not leaning against the speculative madness of the late 1990s.

That left Greenspan’s successor on a very slippery slope.

European Central Bank President Mario Draghi’s famous 2012 promise to do “whatever it takes” to defend the euro took the ECB down the same path – first zero interest rates, then quantitative easing, now negative policy rates.

Most major central banks are clinging to the false belief that there is no difference between the efficacy of the conventional tactics of monetary policy and unconventional tools such as quantitative easing and negative interest rates.

Therein lies the problem. In the era of conventional monetary policy, transmission channels were largely confined to borrowing costs and their associated impacts on credit-sensitive sectors of real economies, such as homebuilding, motor vehicles, and business capital spending.

As those sectors rose and fell in response to shifts in benchmark interest rates, repercussions throughout the system (so-called multiplier effects) were often reinforced by real and psychological gains in asset markets (wealth effects).

Two serious complications have arisen from this approach. The first is that central banks have ignored the risks of financial instability.

Second, politicians, drawing false comfort from frothy asset markets, were less inclined to opt for fiscal stimulus – effectively closing off the only realistic escape route from a liquidity trap.

The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” – the uneconomic loans made to insolvent Japanese borrowers in the 1990s. Central banking, having lost its way, is in crisis. Can the world economy be far behind?

Focusing on the EU’s survival:

Although they disagree on solutions, experts broadly agree on the list of things that needed to be fixed. These include:

• Completing the Banking Union;
• Breaking the ‘doom loop’ between banks and their sovereigns;
• Ensuring EZ-wide risk sharing for Europe-wide shocks;
• Cleaning up the legacy debt problem;
• Coordinating EZ-level fiscal policy while tightening national-level discipline;
• Advancing structural reforms for a better functioning monetary union.

Each chapter presents solutions to one or more of these challenges, and several of the chapters view solutions to one problem as inexorably linked with the solution to one or more of the other problems.

Lessons learned and progress to date on fixing the Eurozone

At the outset, we must acknowledge that there is nothing novel about the notion that the Eurozone needs completing. The basic shortcomings have been known and discussed by economists since the euro was launched. This may be seen as reassuring in the sense that the realisation that the Eurozone has shortcomings does not depend on elaborate new theories, empirical findings, or controversial interpretations of the EZ Crisis. Based on nothing more than simple economic logic and basic economic facts, many flaws were obvious from the start.

For example, a CEPR report wrote:

“The ECB suffers serious faults in its design that sooner or later will surface. This is likely to happen when large shocks [Editors’ note: the Report refers to the 1997 Asian Crisis], hit euroland. … The lack of centralized banking supervision, together with the absence of clear responsibilities in crisis management, risk making the financial system in euroland fragile. No secure mechanism exists for creating liquidity in a crisis, and there remain flaws in proposals for dealing with insolvency during a large banking collapse.” (Begg et al 1998).

These problems were swept under the rug during the halcyon days of the Eurozone’s first decade.

Fixing the Eurozone is a job half done. Nobel Prize winner Chris Pissarides, writes:

“There are certain conditions needed to make a common currency across diverse economies a success and the Eurozone is clearly not satisfying them.”

Given the wide range of shocks arising from the current situation in Europe and beyond, now is not the time to relax. The job of fixing the Eurozone must be completed sooner rather than later. At their summit next week, EU leaders should find the time to restart the process of repairing Europe’s monetary union.

Adam Creighton writes:  Some of the world’s leading economists are hosing down fears that the US – and by extension the west – is about to lose its economic hegemony.

In the coming few years, even a decade, no. — Anat Admati, Professor of finance and economics at the Stanford Graduate School of Business. 

No, the primacy of the US follows from the fact that it offers the greatest scope for innovation by its population relative to any other country. Every American is thinking of a new way to do old things or a way to do new products and technologies, to make a fortune. And the venture capital market obliges by providing the finance to translate the idea of the new innovation into actual innovation. The US is a mecca for people with ideas and skills that blend into this landscape. — Jagdish Bhagwati, professor of economics, law and international relations at Columbia University.

That’s already happened as regards global trade. It is about to happen in the production of goods and services. In the area of finance, the US will remain the top dog for quite a bit longer. — Willem Buiter, Global chief economist at Citigroup, former professor of political economy at LSE. 

In a peaceful world other countries should catch up to the US way of doing things. And in the current trend, the US seems to be going out of its way to pursue inefficiency. Holland is a nice place to live. It was the “powerhouse” of the 17th century. Is it a worse place to live now that other countries have caught up? — John Cochrane, Senior fellow at the Hoover Institution, Stanford. 

No, China is headed rather rapidly toward zero per cent growth. After a long period of adjustment, it will re-emerge with something like a four per cent growth rate. I am a China optimist for the long-term, but not for the next 10 years. — Tyler Cowen, Professor of economics at George Mason University, US.

No, the only potential competitor is China, and it will hit a wall, or explode, unless it figures out how to make its political system much more open. I see no evidence that the Chinese Communist Party will ever let this happen. — Eugene Fama, Professor of finance at the University of Chicago Booth School of Business. He shared the Nobel prize in economic sciences in 2013 with Robert Shiller and Lars Peter Hansen for work on the empirical analysis of asset prices.

In due time, the US will surely cease to have the world’s largest GDP. Even if per capita incomes in China only grow to 40 per cent of US levels, China will become the larger economy. However, over the past few years, the US has looked somewhat stronger and China has looked somewhat weaker. The US system of decentralised capitalism can also create wasteful investment and overbuilding, but we continue to also have an abundant supply of more productive entrepreneurs. Like Australia, America’s open and free culture abets innovators and encourages start-ups. America’s biggest weakness, which will surely cause us even larger problems in the 21st century, is its education system.  Edward Glaeser, Professor of economics at Harvard. With a PhD from the University of Chicago.  

Yes, eventually. For a while the US will have company from China and Europe. —Michael Spence, Professor of economics at New York University’s Stern School of Business. He shared the Nobel Memorial Prize in economic sciences in 2001. 

Not any time soon. Europe could have given the US a run for its money but I think the troubles there will resurface; the single currency is a problem. — Richard Thaler, Professor of behavioural science and economics at the University of Chicago Booth School of Business. 

I doubt it. I would not deny that the economy of the US has structural problems, not least in the areas of education, health and infrastructure. Yet, when we look at China and Europe, potential US rivals, the problems they face seem even bigger. Future prosperity will also depend increasingly on innovation, and there the US still leads by a wide margin. — William White, Chair of the OECD’s economic and development review committee. 

New Fed regional Governor discusses the need to reduce the threat of banks still ‘too big to fail.’  Kashkari on Ending TBTF.  Kashkari on Ending TBTF

Kashkari, who has worked for Goldman Sachs and in the Treasury Department during the administration of George W. Bush, is newly appointed to the US Federal Reserve in Minneapolis.  He finds big banks a significant threat to the US economy.

It is well to remember that banks are an unusual business.  They use other people’s money to store deposits, grant loans and earn interest on the monies they hold. These monies are always other peoples’ monies, and for this reason the business needs to be highly regulated.  It has not been.

For everyone but the top 1 percent of earners, the American economy is broken. Since the 1980s, there has been a widening disconnect between the lives lived by ordinary Americans and the statistics that say our prosperity is growing. Despite the setback of the Great Recession, the U.S. economy more than doubled in size during the last three decades while middle-class incomes and buying power have stagnated. Great fortunes were made while many baby boomers lost their retirement savings. Corporate profits reached record highs while social mobility reached record lows, lagging behind other developed countries. For too many families, the American Dream is becoming more a historical memory than an achievable reality. New Economics