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The world this week

Politics
Business
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The world this week

Politics
Oct 6th 2022

In the first round of Brazil’s presidential election Jair Bolsonaro, the

populist incumbent, did better than expected. He had been trailing Luiz
Inácio Lula da Silva, a leftist ex-president, by double digits in the polls for
months, but on the night he was only five points behind. The two candidates
now head to a run-off on October 30th. Mr Bolsonaro, a fan of Donald
Trump, falsely suggests that the election is likely to be rigged, and may not
accept the result if he loses.

Russia went through the motions of illegally annexing four provinces of

Ukraine, following sham referendums held at gunpoint. Vladimir Putin now
claims that these provinces are part of Russia, but his spokesman was unable
to say exactly where the borders might be. Russia does not fully control any
of the four, and holds only roughly half of two of them. Mr Putin’s land-grab
was widely condemned.

Ukraine ignored it and continued to push back the Russian invaders. Its
forces recaptured Lyman, a rail hub, and advanced rapidly in the south,
where tens of thousands of Russian troops are at risk of being trapped on the
west side of the Dnieper river. The bridges they might retreat across have
been blown up. Some of Mr Putin’s henchmen sought to blame Russia’s
defence minister, Sergei Shoigu, for the shambles.

The Kremlin said it had drafted 200,000 men to fight in Ukraine. At least
300,000 have fled Russia since the draft was announced. Finland stopped
issuing tourist visas to Russians, many of whom have been using Helsinki
airport to escape on planes that are not subject to sanctions.

Germany’s €200bn ($197bn) energy aid package fuelled fury in Europe.

Some politicians said that by going it alone Germany had undermined a
common approach to dealing with the energy crunch. The European
Commission said it was committed to “avoiding harmful subsidy races” in
the single market.

The inaugural meeting of the European Political Community took place in

Prague. Leaders from the 27 member states of the EU and 17 other European
countries, including Britain, Switzerland, Turkey, and by video link,
Ukraine, gathered to discuss security and economic issues. The forum was
proposed by Emmanuel Macron, the president of France, as a means of
forging pan-European unity on a number of issues.

Denmark called an early election for November 1st. The country faces
soaring energy bills and is nervous about Russian aggression after two gas
pipelines were sabotaged in nearby waters. Also, Mette Frederiksen, the
prime minister, has come under pressure for having illegally ordered a cull
of mink in 2020, believing it would help stop the spread of covid-19.

After ravaging Cuba, Hurricane Ian swept through Florida, killing 120
people. That was the highest storm death toll in the state since 1935.

The lady is for turning

Britain’s Conservative government plunged in the polls after markets
punished its plan for unfunded tax cuts. A month after taking office, Liz
Truss, the prime minister, is more unpopular than Boris Johnson, her
predecessor, ever was. Kwasi Kwarteng, the chancellor of the exchequer,
dropped plans to abolish the 45% top rate of tax. The Tories bickered over
welfare cuts and other policies. Standard & Poor’s and Fitch put Britain’s
credit rating on a “negative” outlook.

Thailand’s constitutional court ruled that Prayuth Chan-ocha, the prime

minister, had not exceeded the constitution’s eight-year term limit and could
stay in power. Mr Prayuth had been suspended from office by the court in
August while it heard an opposition-party petition arguing that his time was
up.

Also in Thailand, dozens of people, mostly children, were murdered in a

gun-and-knife attack at a day-care centre in the north-east. The suspect, a
former police officer, killed himself.

A stampede at a football stadium in the Indonesian city of Malang killed at

least 131 people. It was triggered by police firing tear-gas to disperse fans
who had run onto the pitch.

A grid failure in Bangladesh left 75% of the country without electricity.

Power was restored to Dhaka, the capital, by evening, and to the rest of the
country by the following day. Bangladesh, like many poor countries, is
suffering from shortages of gas as Europe tops up its supplies for winter.
North Korea fired a ballistic missile that flew more than 4,000km, far
enough to reach Guam. It was the farthest a North Korean missile has ever
travelled. A South Korean missile test ended in failure when it crashed to the
ground.

Protests against Iran’s theocracy continued across the country. Some of the
most striking were in universities and schools, where many female students
threw off their headscarves and chanted songs denouncing the bossiness and
corruption of clerical rule.

The two main sides in the eight-year-long civil war in Yemen failed to
renew a truce signed in April that had been extended several times. But all-
out war has yet to resume. The United Nations special envoy, Hans
Grundberg, begged the adversaries to return to negotiations.

The zero-covid approach

Xinjiang in western China suspended passenger train services leaving the
region to prevent the spread of covid. A local official said Xinjiang was
facing a “major public-health emergency”.

Indonesia became the first country to approve the emergency use of an

mRNA covid vaccine developed in China. The Chinese government has yet
to approve any mRNA vaccines for use among its own population, except in
clinical trials.

Burkina Faso suffered its second coup in less than a year. The new regime
seized power after accusing the old one of not doing enough to stop jihadists
who now plague large parts of the country.

Ethiopia agreed to participate in peace talks hosted by the African Union

with rebel forces from Tigray that it has been battling for two years. The war
has left thousands of people starving in Tigray.

The commander of Uganda’s army, Lieutenant-General Muhoozi

Kainerugaba, threatened on Twitter to invade neighbouring Kenya. It was a
joke, but Kenyans did not find it funny. Uganda’s president, Yoweri
Museveni, stripped the general of his job but also promoted him. The
general is his son, and possibly his favoured successor.
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The world this week

Business
Oct 6th 2022

Elon Musk changed course and offered to go ahead with his $44bn deal to
buy Twitter, but only if a forthcoming trial that could force him to complete
the takeover is stopped. A recent preliminary hearing in the case did not go
well for his legal team. The mercurial Mr Musk offered to take Twitter
private in April, said the offer was on hold in May, and abandoned the deal
in July, prompting the legal action. He has suggested that he will turn the
platform into “X”, an everything app, similar perhaps to the superapps that
combine messaging, shopping and services in Asia.

A cruel summer
Stockmarkets rallied briefly over the first two days of trading of the fourth
quarter, after a brutal sell-off at the end of the third quarter. Despite some
gains in August, share indices recorded an overall loss from July 1st to
September 30th. The S&P 500 was down by 5% over the quarter—
September was its worst month since March 2020, the start of the pandemic.
The NASDAQ Composite shed 4% and the Dow Jones Industrial Average
7%. The pain was worse in China. The CSI 300, which comprises stocks on
the Shanghai and Shenzhen exchanges, finished the quarter 15% lower than
at the start.

Bond markets were calmer. The yield on ten-year British gilts eased back to
around 4% after the government ditched its plan to scrap the top rate of
income tax (two months ago the yield was around 2%). The yield on the ten-
year US Treasury fell back to 3.6% having risen above 4%. In Britain banks
started re-offering some mortgage products they had withdrawn amid the
market uncertainty. The interest rate on an average two-year fixed-rate
mortgage rose above 6% for the first time since 2008.

The share prices of Chinese property companies rebounded following a

number of government announcements to shore up the housing market. In
addition, the People’s Bank of China lowered interest rates on certain loans
for first-time buyers.
OPEC+ said it would cut oil production by 2m barrels a day, around 2% of
global supply. The headline figure is the biggest reduction to output since
2020, but some OPEC members are already struggling with production
targets so the overall effect will be lower. Still, it was a blow for the Biden
administration and European governments, which had pressed the cartel to
keep cuts to a minimum so that prices don’t rise. The White House press
secretary said that OPEC was now clearly “aligning with Russia”.

Annual inflation in the Netherlands (measured by the CPI) surged to 14.5%

in September. Energy prices were up by 200%, year on year. Turkey’s
inflation rate rose above 83%; transport and food prices increased at an even
faster clip.

Australia’s central bank lifted its main interest rate by a quarter of a

percentage point, to 2.6%. Markets had expected a bigger rise, but the bank
defended the smaller move because the rate has “increased substantially”
this year.

Executives at Credit Suisse had to battle rumours that the bank is in trouble.
A memo sent by the chief executive, Ulrich Körner, to staff, reassuring them
about the bank’s “strong capital base and liquidity position”, elicited the
opposite effect in the markets. Its credit default swaps, which act as an
insurance of a default, soared to new highs. Cooler heads dismissed the idea
that Credit Suisse would become the next Lehman Brothers.

Apple will have to adapt the charger for iPhones in the EU, after the
European Parliament approved new rules to standardise charging points for
linking electronic devices to USB-C connections. The change applies to all
products, so some items made by Samsung and others will also have to
adapt.

The World Trade Organisation forecast that the global trade in goods,
measured by volume, will grow by 3.5% this year, but by only 1% in 2023.
Demand for imports will soften, it said, for a variety of reasons related to the
squeeze on household spending.

Geely, a Chinese carmaker that owns the Volvo and Lotus brands, bought a
7.6% stake in Aston Martin. Geely has long wanted a piece of the British
maker of sports cars (it is seen as a potential buyer of the firm), and says it
looks forward to future collaborations.

Death and taxes

Dignity, the only publicly listed funeral provider in Britain, reported a half-
year pre-tax loss. The firm is not immune from the more earthly problems
bedevilling other businesses. Rising fuel costs have caused it to consider a
surcharge on the gas burned at its crematoriums. And although lower death
rates from covid-19 are a blessing for us all, it has made year-on-year
comparisons about the business difficult. Still, Dignity noted “positive
signs” about its market, a nod to the fact that there will always be a demand
for its services.
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The world this week

KAL’s cartoon
Oct 6th 2022

Dig deeper into the subject of this week’s cartoon:

Ukraine’s military success is reshaping Russia as well as the war
Russia’s annexations in Ukraine are a legal and strategic mess
Could the war in Ukraine go nuclear?

KAL’s cartoon appears weekly in The Economist. You can see last week’s
here.
This article was downloaded by calibre from https://www.economist.com/the-world-this-week/2022/10/06/kals-cartoon
Leaders

What next?
On a knife-edge
Truss deficit
Are management consultants useful?
How will Elon Musk use his superpowers?
After the chaos

A new macroeconomic era is emerging. What will

it look like?
A great rebalancing between governments and central banks is under way
Oct 6th 2022

FOR MONTHS there has been turmoil in financial markets and growing
evidence of stress in the world economy. You might think that these are just
the normal signs of a bear market and a coming recession. But, as our
special report this week lays out, they also mark the painful emergence of a
new regime in the world economy—a shift that may be as consequential as
the rise of Keynesianism after the second world war, and the pivot to free
markets and globalisation in the 1990s. This new era holds the promise that
the rich world might escape the low-growth trap of the 2010s and tackle big
problems such as ageing and climate change. But it also brings acute
dangers, from financial chaos to broken central banks and out-of-control
public spending.

The ructions in the markets are of a magnitude not seen for a generation.
Global inflation is in double digits for the first time in nearly 40 years.
Having been slow to respond, the Federal Reserve is now cranking up
interest rates at the fastest pace since the 1980s, while the dollar is at its
strongest for two decades, causing chaos outside America. If you have an
investment portfolio or a pension, this year has been gruesome. Global
shares have dropped by 25% in dollar terms, the worst year since at least the
1980s, and government bonds are on course for their worst year since 1949.
Alongside some $40trn of losses there is a queasy sense that the world order
is being upended as globalisation heads into retreat and the energy system is
fractured after Russia’s invasion of Ukraine.

All this marks a definitive end to the age of economic placidity in the 2010s.
After the global financial crisis of 2007-09 the performance of rich
economies assumed a feeble pattern. Investment by private firms was
subdued, even at those making monster profits, while governments did not
take up the slack: the public capital stock actually shrank around the world,
as a share of GDP, in the decade after Lehman Brothers collapsed. Economic
growth was sluggish and inflation was low. With the private and public
sectors doing little to stimulate more activity, central banks became the only
game in town. They held interest rates at rock-bottom levels and bought
huge volumes of bonds at any sign of trouble, extending their reach ever
further into the economy. On the eve of the pandemic central banks in
America, Europe and Japan owned a staggering $15trn of financial assets.

The extraordinary challenge of the pandemic led to extraordinary actions

which helped unleash today’s inflation: wild government stimulus and bail-
outs, temporarily skewed patterns of consumer demand and lockdown-
induced supply-chain tangles. That inflationary impulse has since been
turbocharged by the energy crunch as Russia, one of the largest exporters of
fossil fuels along with Saudi Arabia, has isolated itself from its markets in
the West. Faced with a serious inflation problem the Fed has already raised
rates from a maximum of 0.25% to 3.25% and is expected to take them to
4.5% by early 2023. Globally, most monetary authorities are tightening too.

What on earth comes next? One immediate fear is of a blow-up, as a

financial system that has become habituated to low rates wakes up to the
soaring cost of borrowing. Although one mid-sized lender, Credit Suisse, is
under pressure, it is unlikely that banks will become a big problem: most
have bigger safety buffers than in the past. Instead the dangers lie elsewhere,
in a new-look financial system that relies less on banks and more on fluid
markets and technology. The good news is that your deposits are not about
to go up in smoke. The bad news is that this system for financing firms and
consumers is opaque and hypersensitive to losses.

You can already see this in the credit markets. As firms that buy debt shy
away from risk, the interest rate on mortgages and junk bonds is soaring.
The market for “leveraged loans” used to finance corporate buy-outs has
seized up—if Elon Musk buys Twitter the resulting debts may become a big
problem. Meanwhile investment funds, including pension schemes, face
losses on the portfolios of illiquid assets they have accumulated. Parts of the
plumbing could stop working. The Treasury market has become more erratic
(see Buttonwood) while European energy firms have faced crushing
collateral calls on their hedges. Britain’s bond market has been thrown into
chaos by obscure derivatives bets made by its pension funds.

If markets stop working smoothly, impeding the flow of credit or threatening

contagion, central banks may step in: already the Bank of England has done
a U-turn and started buying bonds again, cutting against its simultaneous
commitment to raise rates. The related belief that central banks will not have
the resolve to follow through on their tough talk is behind the other big fear:
that the world will return to the 1970s, with rampant inflation. In one sense
this is alarmist and over the top. Most forecasters reckon inflation in
America will fall from the present 8% to 4% in 2023 as energy price-rises
ebb and higher rates bite. Yet while the odds of inflation going to 20% are
tiny, there is a glaring question about whether governments and central
banks will ever bring it back down to 2%.

A moving target
To understand why, look beyond the hurly-burly to the long-term
fundamentals. In a big shift from the 2010s, a structural rise in government
spending and investment is under way. Ageing citizens will need more
health care. Europe and Japan will spend more on defence to counter threats
from Russia and China. Climate change and the quest for security will boost
state investment in energy, from renewable infrastructure to gas terminals.
And geopolitical tensions are leading governments to spend more on
industrial policy. Yet even as investment rises, demography will weigh ever
more heavily on rich economies. As people get older they save more, and
this excess of savings will continue to act to depress the underlying real rate
of interest.

As a result the fundamental trends in the 2020s and 2030s are for bigger
government but still-low real interest rates. For central banks this creates an
acute dilemma. In order to get inflation down to their targets of roughly 2%
they may have to tighten enough to cause a recession. This would incur a
high human cost in the form of job losses and trigger a fierce political
backlash. Moreover, if the economy deflates and ends up back in the low-
growth, low-rate trap of the 2010s, central banks may once again lack
enough stimulus tools. The temptation now is to find another way out: to
ditch the 2% inflation targets of recent decades and raise them modestly to,
say, 4%. That is likely to be on the menu when the Fed begins its next
strategy review in 2024.

This brave new world of somewhat higher government spending and

somewhat higher inflation would have advantages. In the short run it would
mean a less severe recession or none at all. And in the long run it would
mean that central banks have more room to cut interest rates in a downturn,
reducing the need for bond-buying and bail-outs whenever anything goes
wrong, which cause ever-greater distortion of the economy.

Yet it also comes with big dangers. Central banks’ credibility will be
damaged: if the goalposts are moved once, why not again? Millions of
contracts and investments written on the promise of 2% inflation would be
disrupted, while mildly higher inflation would redistribute wealth from
creditors to debtors. Meanwhile, the promise of moderately bigger
government could easily spiral out of control, if populist politicians make
reckless spending pledges or if state investments in energy and industrial
policy are poorly executed and morph into bloated vanity projects that drag
down productivity.

These opportunities and dangers are daunting. But it is time to start

weighing them and their implications for citizens and businesses. The
biggest mistakes in economics are failures of imagination that reflect an
assumption that today’s regime will last for ever. It never does. Change is
coming. Get ready.■
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weekly Cover Story newsletter.
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what-will-it-look-like
On a knife-edge

To win Brazil’s presidency, Lula should move to

the centre
Another term for the populist Jair Bolsonaro would be bad for Brazil—
and the world
Oct 4th 2022

LIKE A SUDDEN encounter with an anaconda, it was tighter than expected.

Several polls had shown Luiz Inácio Lula da Silva, a leftist former president,
beating Jair Bolsonaro, the right-wing incumbent, by double digits. Some
predicted that Lula would win over 50% in the first round of Brazil’s
presidential election, making a second round unnecessary. But in the actual
vote on October 2nd he won only 48% to Mr Bolsonaro’s 43%. (The reason
the polls undercounted Mr Bolsonaro’s supporters is uncertain, but it may be
that many are “shy”, or suspicious of pollsters and reluctant to share their
views with them.) The two candidates will face a run-off on October 30th,
and Brazil faces a further month of polarisation .

Lula remains the narrow favourite, not least because Mr Bolsonaro repels so
many voters: he is crass, bragging about his virility and sneering at women
he deems unattractive. He is a Trumpian populist, who lies as easily as he
breathes and imagines conspiracies everywhere. He makes no effort to stop
the destruction of the Amazon rainforest. His handling of covid-19 was
disgraceful. His circle overlaps with organised crime. He undermines
institutions, from the Supreme Court to democracy itself. He hints that the
only way he can lose the election is if it is rigged, and that he will accept no
result except victory. He openly incites violence. In a recent poll, nearly
70% of Brazilians said they feared physical harm because of their political
views.

Yet despite Mr Bolsonaro’s manifest unfitness for high office, Lula is only a
few points ahead. Much of this comes down to two reasonable fears about
him: that he may be too soft on corruption and too left-wing on economics.

Lula spent 18 months in prison for taking bribes and was freed in 2019 after
his convictions were overturned. He maintains his innocence. But in the eyes
of many voters the taint of graft still hangs over both him and his Workers’
Party because of “Lava Jato” (Car Wash), a vast bribery scandal centred on
the state oil giant. Lula has never apologised for Lava Jato, for which he
bears some political responsibility. He should do so—and vow that if
elected, he will pick a fearless attorney-general from the list recommended
by the public prosecutor’s office.

On economics, Mr Bolsonaro’s record has been fair. Inflation is falling,

growth is picking up and the state has this year dished out extra aid to
roughly 20m poorer families. Lula, when president, governed pragmatically
and presided over a commodity boom, but failed to address underlying fiscal
problems, such as out-of-control pensions. He chose an inept successor,
Dilma Rousseff, on whose watch the economy crashed. This time, Lula
would start with tougher fiscal conditions than he faced when last in power.
And his platform, though vague, includes troubling streaks of old-fashioned
leftism. He sees the state as the engine of growth; he wants to “Brazilianise”
petrol prices.

To convince swing voters that he can be trusted with their future prosperity,
he should move closer to the centre. He should publicly name a moderate
economist as his pick for finance minister. He should reassure farmers that
he will not tolerate land invasions organised by social movements close to
his party. (These are rarer than landowners claim, but widely feared.) He
should promise not to nationalise any industries. He should stop toying with
the idea of interfering with media freedom.

Such a shift would help him win—and govern. Many of Mr Bolsonaro’s

allies won office this week in Congress or as state governors. For Lula to
muster a legislative majority, he will need help from the centre.
Encouragingly, the two main candidates who were knocked out of the
presidential race, both moderate, have endorsed him.

Jair today, gone tomorrow?

But the coming month will be tense whatever he does. Mr Bolsonaro has
convinced a lot of Brazilians of terrifying falsehoods about Lula, such as
that he would close down churches. The president has primed his supporters
to distrust both Brazil’s electronic voting system and its traditional, fact-
checking media. If he loses, he may claim that he won and urge his
supporters to take to the streets. A second term for such a man would be bad
for Brazil—and the world. Only Lula can prevent it. Claiming the centre
ground is the best way to do so. ■
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move-to-the-centre
Truss deficit

Britain’s Conservatives do not understand how

much things have changed
The markets are a little calmer. The mess remains
Oct 6th 2022

“IGET IT,” said Liz Truss, the prime minister, in an address to the
Conservative Party conference in Birmingham on October 5th, “and I have
listened.” She doesn’t, and she hasn’t. On September 23rd Britain’s
government spooked markets because it decided to embark on a borrowing
spree to pay for big tax cuts. That caused a jump in yields on British
government bonds and prompted the Bank of England to intervene in
markets. At this week’s conference the Tories offered a small change of
policy, a masterclass in internecine warfare and little sign that they
understand how much things have changed.

Start with the change in policy. By reversing his planned abolition of the top
rate of income tax, Kwasi Kwarteng, the chancellor of the exchequer, headed
off an immediate revolt among Tory MPs and calmed markets a little. But
that reversal undoes only a small part of the damage. Giving rich people a
tax break would have cost the Treasury an estimated £2bn ($2.3bn, or 0.1%
of GDP) in receipts; the tax cuts that remain will cost £43bn, and that is on
top of an even bigger unfunded package to hold down energy bills. As Ms
Truss said herself this week, abolishing the top rate of tax was not a core
part of her plan, even if it was a totemic one. The fundamental question—
how the government is going to pay for those tax cuts—remains.

The evidence suggests that the government itself does not know. Ms Truss
and Mr Kwarteng have committed to producing a medium-term fiscal plan
in the next few weeks, which will be scrutinised by the Office for Budget
Responsibility (OBR), an independent watchdog. But the OBR is very
unlikely to buy the government’s line that tax cuts pay for themselves, and
Ms Truss has opposed compensating tax rises as a matter of moral principle
as well as economic policy. That leaves the option of spending cuts and the
hope of supply-side reforms.

Slashing spending would be hard in the best of circumstances. Departmental

budgets have already been squeezed by inflation. Cutting back on capital
spending would be a bizarre thing for a pro-growth government to do. But it
has become harder still because of the ungovernability of the Conservative
Party. Having forced a U-turn on the top rate of tax, rebellious Tory MPs are
lining up to oppose the possibility of real-terms cuts to welfare payments.
Cabinet members are breaking ranks, too; the principle of collective
responsibility no longer applies.

As for promised supply-side measures to boost growth, Ms Truss is right

that they are badly needed. But the risk is growing that a bodged set of tax
cuts will be followed by a cartoonish mix of deregulation and posturing. A
blanket commitment to repealing EU laws either means ditching good rules
as well as bad, or a cosmetic exercise in relabelling European laws as British
ones. Plans for investment zones appear to be focused on left-behind places
rather than the country’s growth engines. Where there is local opposition to
plans to build more homes and fast-track infrastructure projects, Tory MPs
will be much less inclined to face it down on behalf of a prime minister who
is already less popular than Boris Johnson at his nadir.

If the prime minister realises how much trouble she is in, she is not showing
it. In her speech she railed against an “anti-growth coalition” of Remainers,
protesters and pundits. She skated past the disastrous impact of the mini-
budget and equated her critics with “enemies of enterprise”. Those lines
might get her applause from the same party members who elected her Tory
leader, but the audiences she has to win round now have changed: Tory MPs
who never much rated her; homeowners whose expected mortgage rates
have jumped appreciably; and, scariest of all, bond-market investors who
might once have trusted British policymakers to get on with things and now
do not. The government lost credibility on September 23rd. The party
conference has dented it further. That is not just bad news for Ms Truss, but
for the economy she wants to invigorate. ■
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understand-how-much-things-have-changed
Consultants under fire

Do McKinsey and other consultants do anything

useful?
Though hated, they often provide a valuable service to the economy
Oct 5th 2022

IF A LIST were made of the most reviled species in the professional world,
only investment bankers would stand between management consultants and
the top spot. Sceptics portray these corporate consiglieri as snake-oil
salesmen, bamboozling chief executives and politicians with management
gibberish and glossy charts while gorging on fat fees. Indeed, the profession
was once the subject of a five-season skewering in a star-studded TV series.
Its title: “House of Lies”.

Recent events have provided even more reasons to hate consultants. “When
McKinsey Comes to Town”, an exposé published on October 4th, drags its
subject through the mud with evidence of decades of scandalous behaviour.
On September 30th prosecutors in South Africa brought criminal charges
against the firm. (McKinsey says the book is a misrepresentation and denies
the charges brought against it.) Its two big rivals, Bain & Company and the
Boston Consulting Group (BCG), have also faced controversies. In France
President Emmanuel Macron has come under attack after an inquiry this
year found the government had spent $1bn on consulting firms with
“tentacular” links with the state.

Despite evidence of dubious conduct, business has never been better. The
big three firms’ total revenue has tripled since 2010, to about $30bn; the trio
now employ around 70,000 people. That implies revenue per employee of
over $400,000, hinting at juicy pay packets for the people at the top. By
comparison, the figure for the big four accountancy firms—Deloitte, PWC,
EY and KPMG—is a comparatively meagre $140,000.

What explains the boom? A shroud of secrecy makes it hard to calculate

how much value the industry adds: few bosses or politicians would credit
consultants for a successful turnaround. As a result there is a widespread
view that all consultants are parasites and those who hire them are fools. In
fact the firms have grown because they provide two services that bosses
want—one more economically beneficial than the other.

The first is an outside opinion. When firms or governments make decisions,

it can pay to buy in rigorous analysis. The danger is that this becomes a self-
protection racket. When bosses want to push through controversial
decisions, from firing staff to breaking up a firm, a consultant’s backing can
bolster their credibility. And legitimate scrutiny, whether from political
opponents or board directors, can be easier to dodge using consultants’
reports in pleasing fonts with scientific-looking tables.

The second service is unambiguously good, both for the people in charge
and the wider economy: making available specialist knowledge that may not
exist within some organisations, from deploying cloud computing to
assessing climate change’s impact on supply chains. By performing similar
work for many clients, consultants spread productivity-enhancing practices.

One defence against an explosion of bogus advice would be better

disclosure. Companies are already required to reveal how much they spend
on their auditors and on investment bankers’ fees on deals. The sums that
individual firms spend on consultants often exceed this, running into the tens
of millions of dollars a year, and should be made public too.
So far the industry has escaped the formal rules that govern lawyers and
bankers. If it wishes to keep it that way, it should adopt a second measure: a
code of conduct that all responsible consultancies adhere to. They should
eschew providing advice that helps bigwigs at the expense of the institutions
they run, or helps autocrats oppress their people. They should also police the
revolving door between government jobs and consultancies. Consultants
have much to offer, but also much still to prove. ■
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anything-useful
Iron Man with a dodgy peace plan

How worried should you be about Elon Musk’s

superpowers?
With great technological power comes great political responsibility
Oct 6th 2022

AS THE BOSS of Tesla, the world’s most valuable carmaker, and SpaceX,
the world’s second-most valuable unicorn, Elon Musk is the stuff of business
legend. As a gifted technologist with an enduring air of misfit adolescence
he also has more than a whiff of the comic book about him. When he is
talked about as an inspiration for Tony Stark in the “Iron Man” and
“Avengers” movies, it is not just because he too is a fabulously rich,
frequently irritating egotist with a saviour complex. It is because he has
every intention of using the remarkable technological capabilities under his
control to change the future course of history.

Mr Stark wanted to put a suit of artificially intelligent armour around the

world. Mr Musk wants to help stabilise its climate (hence his focus on
electric cars) and to establish an outpost of civilisation on Mars (hence the
rockets, one of which sent four astronauts to the International Space Station
on October 5th). To help fund the Mars effort, SpaceX launched Starlink, a
huge constellation of satellites that provide internet access to isolated users.
Meanwhile, Mr Musk said on October 3rd that he would, after all, buy
Twitter, a social-media platform—a move he portrays as a civilisation-
preserving defence of free speech.

Given Mr Musk’s desire to change the future, it is hardly surprising to see

him using the powers he is accruing to intervene in the present, too. After
the invasion of Ukraine, SpaceX sent Starlink terminals and switched on
satellite coverage. Ukraine has been vocal in its gratitude for this
intervention, which helped its cities restore vital services and its forces
prevail on the battlefield. But it was less thrilled when Mr Musk took to
Twitter this week to suggest a “peace plan” that would give Crimea to
Russia, and possibly other occupied territories, too. Volodymyr Zelensky,
Ukraine’s president, asked his own 6.7m followers whether they preferred a
pro-Ukraine Mr Musk or a pro-Russia one—a reminder, if one were needed,
of Twitter’s influence in shaping global perceptions of the war.

The fact that Mr Musk can, in a single week, get into a Twitter spat with the
president of Ukraine, in an online discussion forum that he has just agreed to
buy, while also sending people into orbit, demonstrates the extent to which
his growing technological superpowers have granted him geopolitical clout.
Should that be cause for admiration or concern?

In themselves, Mr Musk’s political musings on Twitter matter little. But

given the platform’s important role in the febrile world of politics, his
decisions about Twitter itself (such as whether to reinstate Donald Trump’s
access), will matter a lot more. So will decisions about Starlink. Whatever
your politics, it is worrying that one man can choose whether to extend
internet access to anywhere on Earth, can decide who can use it—and can
turn it off at will.

There is no commercial case against Mr Musk’s accumulation of power.

Starlink is not a monopoly; nor is SpaceX’s satellite-launch business (though
it is currently the West’s only option for launching astronauts into orbit); nor
is Twitter. But all three have global importance, and will do for some time to
come.
Mr Stark’s attempt to put armour round the Earth led to its near destruction;
the chastened billionaire subsequently accepted UN oversight. Mr Musk
seems unlikely to follow suit. Comic-book fans must hope instead that he
takes to heart the wisdom imparted to Peter Parker, aka Spider-Man: “With
great power comes great responsibility.” As Robert Caro observed in
response to Lord Acton’s famous dictum, power may not always corrupt, but
it always reveals. What Mr Musk’s power reveals will bear close inspection.
■
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musks-superpowers
Letters

On the police in America, qualified-majority voting, Agatha

Christie, Italy, Myanmar, Janus words
On the police in America, qualified-majority voting, Agatha Christie,
Italy, Myanmar, Janus words

Letters to the editor

A selection of correspondence
Oct 6th 2022

Guns and crime

The American public’s loss of faith in the police, which varies between
communities, is a contributing factor to the rise in violence in recent years
(Special report on violent crime in America, September 17th). But so are
irresponsible efforts by the gun lobby, politicians eager for donations, and
Supreme Court justices who reject reasonable gun regulations. Gun
manufacturers encourage a vicious cycle by arguing that the more people
have guns, the more unarmed people need to buy a weapon for protection.

The understandable default assumption among the police who engage

directly with an individual or a group for whatever reason, legitimate or not,
is that they are in a situation where guns are present and easily accessible.
Like any human, their natural precaution is to be ready to respond as rapidly
and promptly as possible to any movement that may be a reach for a
weapon.

Imagine how much worse the situation may become if Republicans succeed
in passing a federal law to require all states to honour gun-carry permits
issued by another state, including in locations where alcohol is served and
spirits, both literal and metaphorical, flow freely.

MARTYN ROETTER
Boston

Clearly, the police are not as sensitive as they ought to be in America. More
focus should be paid to the “warrior” police culture, which is inculcated in
police academies. The relatively brief, localised police-academy training
emphasises the zealous enforcement of community service and a gung-ho
spirit. Police trainers should realise that their graduates, who will come into
daily contact with cultures of criminality and the like, can become hardened
to the more delicate sensibilities needed to deal with racial diversity, human
rights, and so on.

Indeed, the police must belong more genuinely to the society they serve. A
good model is the military academies, which ingrain value systems in cadets
before they graduate and are assigned to duty, putting a firm emphasis on the
public-service aspects of their role.

DOUGLAS SIKORSKI
Laguna Beach, California

Ricky Usher should be highly commended for his efforts to curb violence
among young men in Atlanta. He mentioned that he knows various relatives
of the young men he is trying to help. But the one relative missing was
fathers. Until young men grow up with a stable father figure in their home,
no amount of policing, social services, or money will solve the problem.

PAUL MCNULTY
Jupiter, Florida
Seeking unity in the EU
The use of qualified-majority voting (QMV) and the veto in the European
Union is complicated (Charlemagne, September 24th). For one thing the
Luxembourg Compromise of 1966 was a misnomer from the outset. It was
not a compromise but an agreement to disagree. France held that a single
member state’s assertion of its vital national interest could override a
qualified majority; the other five member states said that it could not. So the
Luxembourg Compromise could not, can not and will not be turned into a
legally binding text.

Moreover, there are fundamental differences in negotiating culture that

derive from a treaty providing for QMV and one requiring unanimity. In the
case of QMV the risks perceived by individual member states to their
interests have to be avoided by a process of negotiation and compromise
(often successfully, which is why so few EU decisions actually require a
formal vote). Unanimity, on the other hand, encourages intransigence and a
refusal to negotiate.

Perhaps the most notable example of circumventing the unanimity

requirement was when Nicolas Sarkozy and Angela Merkel persuaded their
colleagues to find a way round an attempted veto of a fiscal treaty by David
Cameron’s government (to extract concessions over single-market financial-
services legislation). But using this tactic is fraught with many difficulties
and limitations, particularly in cases involving new accessions, foreign
policy and security and tax.

That is why we can expect the EU to continue to struggle over the scope of
QMV. Most of the focus is on the use of what is called the passerelle clause
in the existing treaty, which allows some limited extension of QMV without
the need for treaty ratification by member states.

DAVID HANNAY
House of Lords
London

Dissociative literature
If Agatha Christie did indeed experience a dissociative fugue for 11 days in
1926 (“The lady vanishes”, September 10th), she may have preferred to
keep secret the sort of traumatic background that tends to accompany
dissociative disorders—usually severe childhood emotional or physical
neglect or abuse. I have treated dissociative patients for nearly 40 years, and
I am repeatedly struck by their secretiveness. Often, they don’t tell their
spouse (or their therapist) many details of their dissociation, or of their
childhood trauma.

Some of our greatest writers show evidence of highly creative, adaptive

forms of dissociation. There are many such stories about pseudonymous
authors in recent books that have been written by Carmela Ciuraru, John
Mullan, Marcy North and Julie Phillips. Fernando Pessoa famously claimed
it was his “heteronyms” that did his writing, and that he was merely the
“empty stage” they lived their lives on.

RICHARD WAUGAMAN
Clinical professor of psychiatry
Georgetown University
Washington, DC

Political roots
The Brothers of Italy (FdI) has its roots in neo-fascism, you say (“Should
Europe worry?”, September 24th). True, there is an undisputable link
between them. However, Italy’s main opposition, the leftist Democratic
Party, a sort of fusion between the Italian Communist Party and the left-
leaning part of the Christian Democratic party, has very deep non-
democratic communist and Stalinist roots. Benito Mussolini has been dead
for almost 80 years, whereas the Soviet Union, with its illiberal principles
and gulags, was active until 1991. Should we also consider these political
roots as a threat to Europe? I don’t think so. The same, I dare say, with the
FdI.

FRANCESCO FRANSONI
Retired Italian ambassador
Rome

Myanmar and Ukraine

Banyan said that “only two Asian governments, the dictatorships of North
Korea and Myanmar” cheered Vladimir Putin’s aggression when Russia
invaded Ukraine in February (September 24th). To give credit where credit
is due, not only did Myanmar not cheer on Mr Putin’s aggression, its
ambassador at the United Nations also joined 140 other member states and
voted for the resolution deploring Russia’s actions, from which India and
China abstained.

STEVEN HONG
North Vancouver, Canada
Fulsome praise
Johnson’s column on Janus words, which have two opposite meanings, was
deliciously intriguing (September 10th). In French we have quite a few of
them. Plus, for instance, can mean “more” or “no more” depending on how
it is used. Hôte can mean “host” or “guest”. Louer, means “to rent” or “to
rent out” with no way
to differentiate.

FLORENT COURAU
Paris

I thought Johnson’s piece on words with opposite meanings was sick.

AARON SCHAD
San Antonio, Texas
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By Invitation

Kirill Rogov on what Russians really think of the war in

Ukraine
Marina Silva on why Brazil’s presidential contest will
decide the Amazon’s fate
Ro Khanna and Zach Wahls on how Democrats can win
back factory towns
Russia and Ukraine

Kirill Rogov on what Russians really think of the

war in Ukraine
The Russian political scientist says it is too early to declare mobilisation a
failure
Oct 5th 2022

VLADIMIR PUTIN began the war in Ukraine in the belief that it would be a
cosplay of triumphs in 1945, that his troops would be marching through
Kyiv and he, like Stalin, would be watching the parade in the Red Square.
Now it looks as though he is trying to cosplay 1941—the dramatic start of
the Great Patriotic War against Nazi Germany.

This is the third version of the Kremlin’s original plan. The first, a blitzkrieg
to capture Kyiv, failed within the first month. The second, the seemingly
inevitable offensive, stalled in the summer and was abandoned in early
September following the success of Ukraine’s counter-offensive. In the third
version, the Russian motherland has been declared in danger and hundreds
of thousands of men are being drafted to fight. The “partial mobilisation”
declared by Vladimir Putin on September 21st looks like forced
improvisation and it is disrupting the balance of interests and loyalties in
Russian society, where views on the war are very mixed.

According to recent opinion polls, conducted by pollsters such as the Levada

Centre which has offices in Moscow, 70-75% of respondents in Russia
support the war with Ukraine. (These surveys were conducted before Mr
Putin announced his mobilisation drive.) But these shocking figures are
deceptive. Public opposition to the war can result in criminal prosecution, so
people who are critical of the war and the regime are less likely to agree to
speak to a pollster. This results in skewed samples and inflates the level of
support for the war.

To understand the nature and composition of the pro-war majority, you need
to dig deeper. By analysing some additional questions, taken from a survey
by the independent pollster the Russian Field Group, we know that about a
third of the Russian population constitutes a solid party of war; some 15%
support the war with reservations; another 20% support the war but would
have preferred it had the war never happened. Russian state television—
instrumental in shaping public opinion—serves all these audiences.

Two main narratives circulate. One is peddled by the best-known talk-show

hosts who tell viewers that the “special operation” is part of Russia’s total
and existential war with the West—which is, of course, hell-bent on
obliterating Russia. This apocalyptic narrative sets up Ukraine as the site of
this great battle. The second narrative, prevalent on news programmes,
emphasises that the “special military operation” in Ukraine is being
conducted by professionals to liberate the Russian people of Donbas and
other regions. It is presented as a “just war” predicated upon Russia’s
responsibility to help Russians in need. Conflict with the West is a secondary
consideration.

The pro-war party consists of three main groups: one is in favour of total
war and a decisive confrontation with the West; the second believes that
Russians are fighting a just war under the banner “responsibility to protect”.
The third group mostly supports military action, but they conform possibly
because they fear to confront Mr Putin and his supporters. The first group
passionately supports the way because they feel that the enemy is already on
Russia’s doorstep; the other two see the threat as far away.
In his mobilisation speech on September 21st, Mr Putin used choice rhetoric
of the party of total war to persuade Russian citizens of the enemy’s
proximity and the need to defend the motherland. Many commentators
declared that this rhetoric would undermine the fragile support of the
majority for the war. I urge more caution. Mr Putin has a long record of
masterfully manipulating public sentiment. By siding with the more militant
part of the pro-war camp, which has long demanded mobilisation, Mr Putin
may force doubters to pick a side and thus polarise society. He calculates
that the greater (though still limited) involvement of the Russian population
in Ukraine may push Russians to support their boys in uniform more
strongly. It will drive a wedge between families whose members fight, and
those whose run for the border or curse the war.

In theory, this could work. The educated and the wealthy, many of them
urban residents, are fleeing mobilisation. Those with more meagre resources
are going to recruiting stations. They may be frightened and apprehensive,
and not very keen to fight, but they are not ready to break away from the
imaginary “national body” whose will and aspirations are expressed for
them by Mr Putin. The fraught nature of their decisions to enlist will
increase their hostility toward those who make the opposite choice. The idea
may be that the departure of defectors will leave a more faithful nation that
will fight and die without hesitation.

In practice, however, the chaotic nature of the mobilisation is throwing off

Mr Putin’s calculations. It has undermined the common man’s confidence in
the state machine, its efficiency and its dedication to a common cause. Thus
it has undermined the very sense of unity and nationhood that Mr Putin
hoped to manipulate. For one thing the mobilisation was announced too late,
when Russian troops were already being defeated by Ukrainian ones. For
another, it has exposed how the centralised administrative machinery, built
by Mr Putin, struggles in an emergency. That is because it is built on
corruption and sycophancy, not competence.

Overall, the war’s outcome will depend on the mood of the group who
support it and on the group of conformists who go along with it. That is
because its most avid proponents, and its most intractable opponents, will
not change their minds. If those who see it as a “just” war start to suspect
that it is slipping into an existential conflict with the West, or if conformists
change their risk calculations because they face being drafted, the balance of
opinion may shift decisively.

That is why recent protests in Dagestan and Yakutia, organised by the

relatives of those being mobilised, are more important than the protests in
Moscow and St Petersburg organised by anti-war activists. The more radical
the narrative justifying the war, the higher the cost and the more hopeless the
management of the mobilisation, the more likely it is that the consensus in
favour of the war will crack. After the muddled start of the mobilisation
campaign, this looks probable. But it would be premature and irresponsible
to say that this has already happened, or that it is inevitable. ■

Kirill Rogov is a Russian political scientist, journalist and writer. He is a

fellow at the Institute for Human Sciences in Vienna and the founder of Re:
Russia, a policy network.
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really-think-of-the-war-in-ukraine
Brazil’s elections

Marina Silva on why Brazil’s presidential contest

will decide the Amazon’s fate
The politician and former environment minister urges Brazilians to vote
for a change of leader
Sep 30th 2022

THE WORLD is going through a series of crises, and we in Brazil are not
immune. Of all the threats we face, from pandemics to the war in Ukraine,
from disruptive technologies to rising inequality, the most troubling are the
erosion of democracy and the destruction of the environment. And in Brazil
they are linked.

Supporters of President Jair Bolsonaro are growing in influence. They

threaten democracy and promote a rampant increase in carbon emissions
from deforestation and fires in the Amazon, as well as the destruction of
biodiversity. According to data from a government research unit,
deforestation in the Amazon in 2021 was 73% higher than in 2018—the year
before Mr Bolsonaro took office. This destruction threatens indigenous
peoples and traditional populations, and exacerbates growing social
inequality. According to the PENSSAN Network, Brazil, an non-
governmental organisation, our country now contains 33.1m starving people,
up from 19.1m in 2020.

Aware of the historic importance of this year’s elections in Brazil—the first

round of the presidential contest is on October 2nd—I decided to run for a
seat in our lower house, the Chamber of Deputies. I have presented to the
former president Luiz Inácio Lula da Silva—the presidential candidate with
the greatest chance of defeating Mr Bolsonaro and who is commonly known
as Lula— a set of proposals for the recovery of the lost socio-environmental
agenda in Brazil. They enhance and update policies that were developed
during the eight years of his government, between 2003 and 2010, in which I
was environment minister for more than five years.

Based on these proposals, publicly accepted by Lula and his prospective

vice-president, Geraldo Alckmin, I have decided to support Lula’s candidacy
in the first round of the forthcoming election. I have endorsed Lula in the
hope that he can win without the need for a run-off, as the best means to
prevent Mr Bolsonaro contesting the election result.

In this article I would like to present some of my proposals for Brazil’s next
government. The first is the principle that environmental policies must be
implemented in an integrated manner by all national ministries and agencies.
A National Climate Authority should be established. It would be responsible
for establishing goals and action schedules for the effective reduction of
carbon emissions, for adaptation and for increasing the country’s resilience
in the face of climate change.

The Plan for the Prevention and Control of Deforestation in the Amazon,
conceived and initiated during my term as minister was effective. It reduced
deforestation in the region by more than 83% between 2004 and 2012
according to satellite monitoring by the National Institute for Space
Research. Both the Amazon plan and a similar one for the cerrado, Brazil’s
savannah, must be resumed and expanded to other important areas of
biodiversity in the country. We should aim for the end of deforestation in
Brazil and for significant investment in reforestation. To do this we must
rethink our production system for agriculture, livestock and forestry in order
to reduce associated emissions of greenhouse gases. This is the path for
Brazil to continue contributing to food security around the world.
Threats to indigenous people and territories, which occupy more than a
quarter of the Brazilian Amazon and are home to the most protected areas of
biodiversity, must end. Traditional communities and quilombolas—
descendants of slaves—have endured serious attacks in recent years, and
these have grown in number under the Bolsonaro government. We must
fully protect the constitutional rights of these populations.

The development of a national payment system for environmental services

and the implementation of a regulated carbon market are essential for
advancing decarbonisation in our country. Brazil has the greatest potential
for carbon sequestration through reforestation in the world, due to its vast
land area, intense sunlight and rainfall patterns. The end of deforestation
combined with the regeneration of biomes and the conservation of
agricultural soils are keys for Brazil to become a carbon-negative economy,
which would benefit the world.

The size, diversity and richness of the country’s biomes and the density and
quality of its scientific community and traditional populations, who have
deep understanding of our flora and fauna, mean Brazil could become a hub
for medicinal discoveries. A National Bioeconomy Policy, combined with
increased numbers of international partnerships, could create a new industry
in the country. Its growth would be of importance both to Brazil and to
South America as a whole.

Finally, Brazil must improve its participation in all multilateral forums,

overcoming the years of setbacks under the Bolsonaro government. With
regards to climate policy, it must act to promote stronger commitments
towards global decarbonisation. Next year Brazil has the opportunity to shift
from being a laggard to a leader through new climate, biodiversity and
energy policies. Such changes are possible with a change of government. ■

Marina Silva is a Brazilian politician and served as the country’s

environment minister between 2003 and 2008. She ran as a candidate in
Brazil’s presidential contests in 2010, 2014 and 2018.
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presidential-contest-will-decide-the-amazons-fate
America’s 2022 midterms

Ro Khanna and Zach Wahls on how Democrats

can win back factory towns
The two politicians place their hopes in economic policy
Oct 3rd 2022

AMERICANS IN AREAS hit hard by deindustrialisation feel abandoned by

the Democratic Party. This is a phenomenon outlined by Mike Lux, a
Democratic strategist, in a recent study of American factory towns. It is also
one that we—a US Representative from Silicon Valley and a state senator
from eastern Iowa—recognise. To regain trust, our party must make sure
that Americans across the country understand how new legislation will help
them through investments in technology and manufacturing. In addition we
should own up to, and reverse, the disastrous trade and economic policies
(adopted by both parties) that have devastated America’s factory towns.

In Iowa, as in many other states, a clear divide has grown between voters.
Democrats over-perform in large and growing urban and suburban
communities and Republicans succeed in small towns and rural areas. The
destruction of Iowa’s once-vibrant manufacturing sector over the past 30
years has had catastrophic consequences and accelerated this divide.
Residents of many small cities have seen their jobs shipped abroad and their
communities have suffered as a result. There is no better example than
Newton in Jasper County, Iowa. Formerly known as the “Washing Machine
Capital of the World,” Newton saw Maytag, a major manufacturer, leave in
the early 2000s. Jasper County was once a Democratic-leaning place, but
Donald Trump carried it with 56% of the vote in 2016 and 60% in 2020.
Reinvigorating American factory towns with new, well-paid manufacturing
and tech jobs is critical if we are to support such communities and spread
wealth. It is only through such gains that Democrats can defeat Donald
Trump’s populist narrative.

To be sure, the trade and economic policies of recent decades are not the
only factors that have contributed to our country’s manufacturing decline.
They are also not the only factors explaining the success of conservative
politics in these communities, especially considering Republicans have not
implemented effective solutions to fix these problems. But Republican
rhetoric about supporting American factory towns has resonated with the
people who call these communities home. Democrats have been painted as
out of touch and recent polling shows that only 23% of rural voters say that
the Democratic Party “cares more about my community” than the
Republican Party. To turn things around, we must show people that we care.

That’s why Democrats need to promote what we’ve delivered in recent years
to win back sceptical voters. That starts with the American Rescue Plan, a
stimulus package signed into law in March 2021, which is funding the
deployment of high-speed broadband internet to rural communities, and the
Bipartisan Infrastructure Act, signed into law in November, which is helping
to repair roads and bridges. Those in Iowa are among the country’s least
structurally sound.

In July, we led the passage of the CHIPS and Science Act. It is the start of a
new economic vision for the future that supports American workers by
making sure advanced manufacturing and production are done here at home,
not offshore. Its aim is not to restrict international trade, but to rebalance
production and reduce the existing trade deficit. We are already seeing the
results with Intel’s new semiconductor factories in Ohio. They are a $20bn
investment and are expected to create at least 3,000 new company jobs in the
state and 7,000 construction jobs. Most of these jobs do not require college
degrees yet they pay well.

By contrast Republicans continue to implement and support policies that

harm workers in Iowa by eroding unemployment insurance and workers’
compensation programmes. The party’s demagogues also stir racial
resentment to divide working-class communities. They oppose legislation
like the PRO Act, introduced last year, which would protect and expand
workers’ rights. Their priorities are more tax cuts for the ultrarich and big
corporations. We saw this clearly with the Trump tax cuts of 2017 and a
recent, similar tax giveaway passed by Republicans in Iowa’s state
legislature.

As our country enters a new era of industrial policy, this is the moment to
make sure our economy works for every community. Democrats must
embrace “inclusive populism”, as Leah Hunt-Hendrix, an activist and writer,
laid out in a recent opinion article in Politico. This requires speaking
honestly to voters about difficult issues like immigration and race. We
should acknowledge that certain communities have been hit harder by
deindustrialisation than others. But we can bring people together through a
shared goal: creating well-paying jobs and making things in America again.
It’s important not to allow ourselves to be divided.

Our economic vision includes fair pay and benefits for working-class
families. It transcends geography, party and race, and can help stitch this
country back together. There’s no time to waste. With the midterms
approaching, Democrats must demonstrate that we are the party that is
taking action to revitalise America’s factory towns.■

Ro Khanna, a Democrat, is the US representative from California’s 17th

congressional district. Zach Wahls, a Democrat, is the Iowa state Senate
Minority Leader.
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democrats-can-win-back-factory-towns
Briefing

Putin at bay
Tweet and sour
Putin at bay

Ukraine’s military success is reshaping Russia as

well as the war
Support for Vladimir Putin’s regime is narrowing fast
Oct 6th 2022 | Kyiv

“RUSSIA, RUSSIA, RUSSIA,” chanted Vladimir Putin on September 30th,

as he announced the annexation of four Ukrainian provinces: Donetsk,
Luhansk, Zaporizhia and Kherson. But within hours his newly expanded
country began shrinking. The Ukrainian army smashed through Russia’s left
and right flanks, at the two extremes of a vast front stretching from the
Black Sea in the south to the Donbas region in the east (see map). “Not since
the initial part of Operation Barbarossa in the second world war has the
Russian army had such a terrible series of reverses on the battlefield,” says
Mick Ryan, a retired Australian general.
The war is by no means over. Russia still occupies some 15% of Ukrainian
territory. Its army will soon swell as the forced mobilisation of some
300,000 reservists announced last month gathers pace. But for the first time
in seven months of war, time and momentum are on Ukraine’s side.

On October 1st Ukrainian tanks rolled into Lyman, a strategic hub in

Donetsk. Later that evening six Ukrainian battalions pierced enemy lines
200 miles (320km) away, in the northern part of Kherson. By the time
Russian soldiers were making appeals for emergency air support via social
media, the Ukrainians had advanced at least 12 miles. “The enemy has
superiority in everything,” wrote Igor Girkin, who led Russia’s first invasion
of Donbas, in 2014, “even using aviation.” By October 6th Russian forces
had fallen even farther back towards the city of Kherson.

In Donbas (which comprises the provinces of Donetsk and Luhansk),

Ukraine is tantalisingly close to routing its enemy. It is bearing down on
weak Russian defensive lines near the towns of Kreminna and Svatove in
northern Luhansk. A member of Ukraine’s military intelligence predicts that
Russia will soon be forced to retreat from Kreminna to save artillery and
other equipment. Svatove is an equally important target, as the site of large
ammunition stores and a gateway to the rest of Luhansk. Pushing the
Russians back to the lines that existed before the start of the current fighting
in February would not be difficult after taking the town, the source said.

The battle for Kherson is even more significant. The province forms one end
of a “land bridge” linking the Crimean peninsula, which Russia seized from
Ukraine in 2014, to Russia. It is also the source of much of Crimea’s water.
The city of Kherson is one of Ukraine’s main ports on the Black Sea, and the
gateway to the others; the loss of it puts all Ukraine’s maritime trade in
jeopardy.

Mr Putin has reportedly insisted that his generals hold Kherson city at all
costs. Ukraine has been exploiting this stubbornness by destroying bridges
and so pinning Russian troops down in what appear to be indefensible
positions with their backs against the Dnieper river. The Russian forces there
are now in danger of encirclement with no obvious way to retreat. Surrender
may be their only option.

After a long stalemate over the summer, the war has acquired a sudden
fluidity. “Ukraine is dictating the operational tempo at the moment,” says a
Western official. Ukrainian generals believe they can achieve more victories
in the three-to-four weeks before Russia’s newly mobilised soldiers begin to
appear in force. “We can get a lot done in that time—and by that I mean
liberating Kherson or northern Luhansk,” says the military source. “When
the mobilised guys join the battle, we will be so prepared it will be like
pouring water on red-hot metal. They will simply evaporate.”

But Ukraine’s onslaught may soon slow down. Its army has been on the
offensive for over a month, devouring ammunition and exhausting troops.
Winter is coming. As the ground grows wetter and muddier, heavy armoured
vehicles will be confined to roads. That tends to disadvantage attackers, as
Russia found in the bogs north of Kyiv in March. It also impedes armies like
Ukraine’s, with many wheeled, rather than tracked, vehicles. Bad weather
makes it harder to use drones to spot targets for artillery, too. Combat
operations will therefore “freeze” around the beginning of November, says
Pekka Toveri, a former chief of Finnish military intelligence.

Yet, even if ground offensives stop, Ukraine will use its American-supplied
HIMARS missiles to hammer Russian barracks and depots. Recent videos
on social media, the Western official notes, show shivering Russian recruits
lighting fires in fields at night in sub-zero temperatures: “That is not going
to be a situation where you have high morale over the winter.” Another
video shows reservists from the Omsk region asking when they will be paid;
local officials reply that they do not have the funds.

Ukrainian troops, in contrast, have been given ample cold-weather gear by

NATO countries and domestic donors. They also have more night-vision
goggles, allowing them to take advantage of shorter days. The result may be
that Russian forces are run ragged by spring.

Mr Putin might nevertheless hope to grind out a victory through sheer mass,
exploiting Russia’s three-to-one advantage over Ukraine in fighting-age
men. Newly mobilised recruits will be used to relieve forces that have not
had a rest for seven months. They could also bring depleted battalions up to
strength and, eventually, create new units to go back on the offensive.
Christopher Dougherty, a former Pentagon planner now at CNAS, a think-
tank, says the war is testing whether a relatively small army using
“information-age tech” can defeat a much bigger force with tactics from the
“industrial era”.

Some European officials worry that Russia will manage to create lots of
basic infantry units that could, at the very least, man defensive positions. But
most doubt that Russia can train, equip and supply hundreds of thousands of
fresh troops. It has large reserves of Soviet-era equipment, says General
Toveri, “but luckily most of it is crap.” Two-thirds of those stocks have been
stored in the open, he adds, and the rest cannibalised for parts. The new
recruits may prove little more than “human speed bumps”, says General
Ryan.

Even if Mr Putin’s reservists cannot turn the tide, can they stave off defeat,
thereby turning the war into a contest of political and economic attrition?
After losing Kharkiv province in September, Russia attacked Ukrainian
dams and power stations. That Russia has fired very few precision missiles
in recent months suggests that its stockpiles are “either depleted or at
minimal levels”, says Konrad Muzyka, a military analyst. But it could make
life even more miserable for ordinary Ukrainians. And the longer the war,
the greater the damage to Ukraine’s economy, which is expected to contract
by 35% this year.

Wedging strategy
In addition to attempting to batter Ukraine into submission, Russia might
also still hope to peel off some of its Western backers. European officials
suspect that the attacks on the two Nord Stream pipelines in the Baltic Sea
on September 26th were carried out by Russia as a warning that it could
strike at other pipelines, compounding Europe’s energy crisis. Mr Putin’s
repeated hints at the use of nuclear weapons are also meant to intimidate.

Yet Ukraine’s advances in Luhansk and Kherson have not yet prompted
escalation. Nor have there been unusual movements of nuclear forces. “We
haven’t seen any changes in their nuclear posture,” noted Jens Stoltenberg,
the secretary-general of NATO, shortly after Mr Putin’s speech.

What is more, the main weapon Mr Putin has deployed against Europe so far
—a throttling of gas exports—seems to have misfired. Europe’s gas shortage
remains serious, but its governments have promised to spend some $500bn
to insulate citizens from price spikes. The continent’s gas storage is more
than 89% filled, which is above average for this time of year. A new
terminal for gas imports has already opened in the Netherlands; two more
are due to open in Germany later this year.

Western public opinion is even warming towards the war. In late September
74% of Germans told pollsters they favoured maintaining support for
Ukraine “despite our rising energy prices”, up from 70% in July. A plurality
—and majorities among supporters of each of the parties in the ruling
coalition—even supported sending tanks, something which the German
government has resisted. Another recent survey shows that the share of
Americans concerned that support for Ukraine might lead to a war with
Russia has declined from 49% in May to 32% in September. The EU is
finalising another round of sanctions on Russia, including an oil-price cap—
a step previously resisted by several members.

Critically, Western arms are still flowing to Ukraine. On October 4th

America announced its latest consignment, including four more HIMARS
launchers, 16 howitzers and GPS-guided artillery rounds that surpass
anything in Russia’s arsenal. France and Denmark are in talks to send
Ukraine as many as a dozen new CAESAR howitzers.

In fact, the question is not so much NATO’s will to support Ukraine, but its
capacity. The current offensives are consuming ammunition at a prodigious
rate. In some cases, the barrels of Ukrainian artillery pieces have melted
from overuse. A European official warns that supplies will inevitably
dwindle after six months or so—just at the point when fresh Russian units
may be entering the war.

But whatever the practical constraints, the war has prompted a profound
shift in the West’s view of Ukraine that diminishes Mr Putin’s chances of
sowing division. In February Ukraine was widely seen as a typically corrupt
former Soviet state that would inevitably get thumped by Russia. By June it
was officially welcomed as a candidate for membership of the European
Union. The spectacular success of Ukraine’s offensive in Kharkiv proved
that it could best Russia on the battlefield. The proportion of Germans who
think that Ukraine will win the war rose from 26% in August to 42% in
September. NATO officers who once questioned whether Ukraine’s soldiers
would make good use of the alliance’s weapons now laud their tactics.
Meanwhile, Russia’s defeats on the battlefield are causing rifts within Mr
Putin’s circle. Two close henchmen, Ramzan Kadyrov, the warlord who runs
Chechnya, and Yevgeny Prigozhin, who heads a mercenary force called
Wagner Group, have launched a synchronised public attack on Sergei
Shoigu, the defence minister, Valery Gerasimov, the chief of the general
staff, and the officers they command. The general who failed to hold Lyman,
said Mr Kadyrov on October 1st, “should be sent to the front lines to wash
off his shame with blood.” Senior members of the Duma, Russia’s
parliament, have joined the criticism.

There are growing signs of dissent within the broader populace, too. Alla
Pugacheva, the most famous pop diva of the Soviet era, took to Instagram to
lament “our boys dying for illusory goals”. The mobilisation of reservists
was dubbed “mogilisation” on social media. (Mogila is Russian for ”grave”.)
It prompted widespread protests and arson attacks against military
recruitment centres, especially in the poor areas dominated by ethnic
minorities that have furnished a disproportionate share of Russia’s troops. In
Dagestan, a largely Muslim region of some 3m people, women rallied
repeatedly against the conscription of more of their sons and brothers.

That Mr Putin, in annexing parts of Ukraine after fake plebiscites, seemed to

be endorsing regional separatism and self-determination, is not lost on such
places. Volodymyr Zelensky, Ukraine’s president, has tried to rally Russia’s
minorities against the war. In a video filmed in front of a memorial to Imam
Shamil, who fought against the Russian conquest of the Caucasus in the 19th
century, he pleads, “Peoples of the Caucasus! All peoples on the territory of
Russia! You have no reason to be among these many who still serve the one
who wants this war. You do not have to die in Ukraine. Your sons do not
have to die in Ukraine. You have no such obligation. Not to your parents, not
to your children, not to your future, not to the future of your land.”

On October 4th associates of Alexei Navalny, a jailed opposition leader,

announced they were re-activating their network around Russia, which had
been banned by the Kremlin as an extremist organisation. They called on
supporters to join the anti-war effort by any means possible, from
distributing leaflets to torching enlistment offices.
But the anti-mobilisation protests have already died down, thanks in part to
harsh policing. In a country where tolerance for any criticism of the
government is evaporating, the main form of dissent is foot-dragging. The
mobilisation has prompted a mass exodus. More than 200,000 men have fled
to Kazakhstan, another 70,000 to Georgia. Some 66,000 have taken refuge in
the EU, despite the decision by Latvia and Estonia to shut their borders to
Russian draft-dodgers.

This flight, in turn, will exacerbate Russia’s economic problems. Only 25%
of Russians have passports. Those leaving are relatively educated and
wealthy urbanites. Hundreds of thousands more are hiding from the draft
inside the country, having left their jobs and their home addresses. These
middle managers, bureaucrats and office clerks are mainstays both of the
government and private enterprise.

Before the mobilisation, Vladislav Inozemtsev, an economist, was expecting

the economy to shrink by about 5% this year; he now expects twice as big a
contraction. The government’s accounts are looking sickly, too. It has swung
from a big monthly surplus at the start of the war to a nagging deficit, as
expenditures have risen and revenues have shrunk (see chart).
The cumulative effect of all this is to call into question Mr Putin’s popular
support. He previously enjoyed the backing not only of militant nationalists,
but the bulk of ordinary Russians, on whom the war in Ukraine was having
little impact. The mobilisation has both split that coalition and undermined
Mr Putin’s reputation for competence.

There is no sign of any immediate threat to Mr Putin’s rule, although

Moscow is rife with rumours of impending martial law and border closures.
Fatalistic acceptance is widespread, just as it was during the pandemic, when
perhaps 1m Russians perished without any uproar. But a businessman
describes a growing sense of his vulnerability by quoting from “The Jungle
Book”, a classic British children’s novel that is apparently a favourite of Mr
Putin: “When a leader of the Pack has missed his kill, he is called the Dead
Wolf as long as he lives, which is not long.” Even if that proves wishful
thinking, no one would have said it a few months ago. ■

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reshaping-russia-as-well-as-the-war
Tweet and sour

Elon Musk’s foray into geopolitics has Ukraine

worried
His Starlink internet service has been crucial to the war effort
Oct 6th 2022 | KYIV

HE WAS A hero, who went out of his way to keep Ukraine functioning as
Russian tanks streamed across its borders. Early in the war Elon Musk gave
it access to his Starlink satellite-internet service. But the entrepreneur’s
saintly status in Ukraine took a hit this week, after a clumsy foray into
geopolitics. On October 3rd he asked his followers on Twitter whether they
approved of a four-point “peace plan” to end the war. The proposals
appeared to mirror Kremlin talking points, urging Ukraine to accept Russia’s
annexation of Crimea, rule out joining NATO and acquiesce to new votes on
secession in the parts of the country Russia has occupied. Some bits of
Ukraine, he later added, “prefer Russia”. The Kremlin called the initiative
“positive”.

Mr Musk’s followers were less keen, voting the idea down 59:41. So was
Volodymyr Zelensky, Ukraine’s president, who asked his followers whether
they preferred the Elon Musk who supports Ukraine to the one who backs
Russia. (They did, 79:21.)

Beyond social media, though, Ukrainian officials are taking Mr Musk’s

initiative seriously. They believe his plan was the product of communication
with Russia’s president, Vladimir Putin. One worries that Mr Putin might
inveigle Mr Musk into withdrawing access to Starlink. He says that Mr
Musk has already rejected a Ukrainian request to make use of Starlink in
Crimea. Another official says Ukraine has been having problems with
Starlink since September 30th.

Starlink uses satellites in low orbit to beam high-speed internet to portable

terminals, of which there are now 20,000 in Ukraine. Most have been paid
for by Western governments, but Mr Musk has contributed by waiving the
usual monthly fees. Mykhailo Fedorov, a deputy prime minister who
appealed to Mr Musk on Twitter two days into the war to get Ukraine back
online, says, “It changed the course of the war to Ukraine’s advantage.”

Starlink has kept Ukraine’s trains running. It has helped get liberated
territories back online. It has been used to transmit government
communications, including, on occasion, Mr Zelensky’s nightly broadcasts.
But it has been most crucial as a secure form of communication on the
battlefield, a soldier says, for everything from mobile command posts to
drones. Ignore the tweets, he argues: “Starlink is our oxygen, you can’t just
turn it off. If we tell Musk [to] piss off and take his Starlinks with him, our
army would collapse into chaos.” ■

Read more of our recent coverage of the Ukraine crisis.

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ukraine-worried
Asia

Forced to defraud
Cover story
A nation at a loss
Pantomime politics
Whose blue?
Victims fleecing victims

The gangs that kidnap Asians and force them to

commit cyberfraud
Syndicates in Cambodia and Myanmar have coerced thousands into
scamming others
Oct 6th 2022 | SINGAPORE

THINGS WERE looking up for Bilce Tan. The 41-year-old Malaysian had
lost his job at the height of the pandemic and had spent months looking for
work. Then in May, a fantastic opportunity came his way. After multiple
interviews, a Malaysian company offered him a job as a business-
development lead at their office in Sihanoukville, a resort town in
Cambodia. The company would pay him 12,000 ringgit ($2,588) a month—
far more than he could make in Malaysia. The benefits included free room
and board at an apartment block that boasted a gym. Mr Tan accepted.

It was not long after he arrived in Sihanoukville that Mr Tan began to feel
uneasy. At the resort where his employers had their office, armed guards
patrolled the boundaries. The walls were topped with barbed wire. During
training, his instructors taught him how to defraud people online. When he
protested, his bosses shrugged. There was no way out of the compound, they
told him. He was trapped.

Mr Tan’s story is a common one. Over the past few years, tens of thousands
of Asians have been lured to casinos and resorts in Cambodia, Laos and
Myanmar, only to find that their “employers” are in fact criminals who force
their “new hires” to work in illegal online-gambling or scamming outfits.

The cons are sophisticated. Mr Tan was furnished with fake social-media
accounts, ten mobile phones, a list of targets and information about their
assets, relationships and education, as well as scripts tailored to different
types of prey. His handlers taught him how to win over vulnerable people
like pensioners and single parents by chatting with them every day.

His trainers also supplied him with photos and videos to support the back
stories of his many personas. Once the mark’s trust had been gained, the real
scam began. Rather than asking for money directly, as in a traditional sting,
he urged the victim to deposit cryptocurrencies in an investment platform
manipulated by the criminals. The sums involved grew bigger and bigger.
Often the mark would, at first, be able to make small withdrawals. Satisfied
that the platform was legitimate, the target would deposit ever more. Then,
one day, the invented persona would disappear, leaving behind a baffled and
broke victim. (Mr Tan claims he never managed to con anyone.)

The 1,200 victims of similar scams known to the Global Anti-Scam

Organisation, a support group, have collectively lost $250m. Twice that
amount was lost by those who contacted CipherBlade, an investigation firm,
last year. Total losses for 2021 may have been in the tens of billions, since
the “vast majority” of victims do not report the crime, reckons CipherBlade.
Precise estimates are impossible, but the International Justice Mission, an
NGO, guesses that syndicates in Cambodia take in some $12bn a year from
online fraud.
The schemes are organised by ethnic-Chinese gangs, which sometimes
collaborate with their local counterparts, says Jeremy Douglas of the United
Nations Office on Drugs and Crime. At first the criminals invested in
casinos—ideal venues for money-laundering. When the Chinese authorities
cracked down on illicit domestic gambling a decade ago, the syndicates
moved their operations south, finding a hospitable environment in the
lawless eastern bits of Myanmar and the scores of special economic zones
across Indochina (see map), where local authorities seem to believe that they
lack jurisdiction.

With the closure of borders at the onset of the pandemic, the casinos’
patrons, most of whom were Chinese, vanished. So the syndicates went
online and cast a wider net, targeting the Chinese diaspora and anyone else
with money, wherever they lived. They quickly turned their sights on
Americans, Australians, Europeans and the middle classes of South-East
Asia, too. But to hook them, they would need digitally savvy workers who
could speak English or South-East Asian languages.

The syndicates procured their workforce by entrapping people like Mr Tan.

Though some work willingly, many are held against their will. According to
the Cambodian government, the syndicates employ between 80,000 and
100,000 foreigners—probably a conservative estimate, says Jacob Sims of
IJM. Most are deceived into travelling to Cambodia.

The first reports of human trafficking emerged in local media in early 2021.
IJM conducted its first rescue in April of that year. Since then, foreign
embassies in Cambodia have been working frantically to extract their
citizens. Some are released when their families pay thousands of dollars in
ransom. Others manage to escape. A few throw themselves off balconies.
The governments of at least eight Asian countries have warned their citizens
about too-good-to-be-true jobs in Cambodia.

At first the Cambodian government stuck its head in the sand. But with
pressure from China and other countries mounting, Hun Sen, the prime
minister, last month announced a crackdown on “illegal gambling”, an
umbrella term for criminality associated with casinos. Since then the
authorities in Sihanoukville and Phnom Penh, the capital, have conducted
raids on the biggest compounds, arresting hundreds of people. But even if
Cambodia does manage to boot out the cyber-scammers, they will simply
relocate to more-welcoming spots in Laos or Myanmar.

Free and safely back in Malaysia, Mr Tan is one of the lucky ones. Yet he
struggles to see it that way. Before he escaped, his captors took his bank
cards and phone. They then locked him out of his bank accounts, preventing
him from accessing his life savings. Before he had a chance to explain to his
wife that he had been kidnapped, she blocked his number. His former
captors began posting her personal information online. She believes Mr Tan
was responsible and now wants a divorce. Mr Tan escaped. But, like victims
the world over, he too has paid a steep price. ■
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them-to-commit-cyberfraud
Cover story

Many Japanese are still reluctant to go unmasked

Why get a face lift when you can get a face covering?
Oct 6th 2022 | TOKYO

ZAWACHIN, A JAPANESE celebrity, has long been known for her stylish
face masks. When she started her career a decade ago, wearing masks helped
draw attention to her lavishly made-up eyes. With time, masks became part
of her brand, and she carved out a niche as a “mask influencer”. The
pandemic brought her passion to the masses. Now she not only promotes
new masks, she also advises those suffering from “mask addiction” on how
to take them off.

Even before covid-19 arrived, mask use was common in Japan. Many wore
them as a barrier against pollen during hay-fever season or to protect others
when sniffly. During the pandemic, the practice became pervasive, though
the government has never enforced a mask mandate. It looks set to continue.
A recent survey showed that half of Japanese would like to keep wearing
masks as much as possible, regardless of medical advice or rules.

Some reckon the attachment to masks is a function of social conformity.

Since mask-wearing has become common practice, no one wants to be the
one to buck the trend. “In Western countries if there’s coercion, people feel
their freedom is invaded, but in Japan people feel it is fair if everyone is
doing it,” says Yonaha Jun, a cultural critic.

Japanese communicative culture may place a greater emphasis on the eyes

than the mouth. Consider emoticons (or their newer avatar, emoji), says
Yamaguchi Masami of Chuo University: in the West, the shape of the mouth
changes the expression, such as :-P or :-D. In Japan, the eyes do: (><) or ^^.
Ms Yamaguchi, who has conducted studies on how facial expressions are
perceived, reckons that people in East Asia tend to spend relatively more
time looking at the eyes of a speaker, while Westerners focus more on the
mouth. Masks, she argues, are thus less of an impediment to socialising.

Moreover, young people have discovered that masks can be useful for
covering up unflattering features, blemished skin or crooked teeth. Men can
get away without shaving, and women without putting on make-up. Some
young women believe masks make their eyes seem larger and prettier.

A new lexicon has emerged. Some call masks “kao pantsu”, or “face
underwear”, reflecting how essential they have become. Among adults, a
“masuku bijin”, or “mask beauty” is someone who looks beautiful in a mask;
a “masuku sagi”, or “mask fraud”, is someone who looks good with one on,
but less so with it off. Fear of being deemed a mask fraud is another reason
to keep the things on.

Zawachin’s advice is to take it slowly. “It takes a lot of courage to take it off
all at once,” she says. Try spending a few days with the mask below your
nose, then shift to wearing it below your lips, and finally below your chin.
Eventually, she suggests, it will start to feel normal to live without a mask. ■

All our stories relating to the pandemic can be found on our coronavirus
hub.
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unmasked
A nation at a loss

Indonesia’s football tragedy puts the spotlight on

its police force
It is widely seen as unaccountable and too powerful
Oct 6th 2022 | SINGAPORE

AFTER A PAINFUL 3-2 defeat to their arch-rivals Persebaya Surabaya on

home turf in Malang, a city on the Indonesian island of Java, Arema
Football Club’s players might have been dreading the customary talking-to
from the manager. Instead, the dressing room in their Kanjuruhan Stadium
became a place to line up corpses. Players cradled the bodies of dying fans.
Out in the corridors, tear gas choked the air.

The pandemonium began just after the final whistle blew on October 1st,
when some 3,000 Arema fans ran on to the pitch. Videos show police in riot
gear chasing them off the field, beating some with batons. Police then fired
round after round of tear gas into the stands, in an apparent attempt to
disperse the crowd. That it did, but not without triggering a stampede for the
exit. By the time the chaos subsided, at least 131 people had died, including
33 children. It is the worst sporting disaster to occur anywhere in nearly six
decades.
Indeed, the tragedy in Malang is nearly identical to one in 1964, when
Peruvian police responded with tear gas to a pitch invasion during a match
against Argentina, causing a stampede that killed 328 people. FIFA,
football’s global governing body, has long banned the use of tear gas at its
tournaments. Yet the rules are mere “guidelines” when it comes to domestic
fixtures such as the one in Malang. Making matters worse, local officials had
sold 4,000 tickets over Kanjuruhan’s capacity of 38,000. And though the
stadium usually opens its exits ten minutes before the end of a game, this
time they stayed locked.

Indonesian football already had a reputation for danger. Hooliganism is rife.

When rival clubs square off, as in this case, only supporters of the home side
are permitted to attend. Many fan groups prepare for skirmishes anyway.
Between 1995 and this month, 86 people had died at football matches in
Indonesia, usually in clashes between fans, according to Save Our Football,
a campaign group.

The tragedy highlights a deeper problem. Indonesia’s national police—Polri

for short—has expanded its power since the military retreated from public
life after democratisation in 1998. Budgets have grown, but accountability
has not. Polri is seen by many Indonesians as heavy-handed, ineffective and
corrupt. Allegations surfaced this year that Ferdy Sambo, an influential
policeman, had arranged the murder of his aide and covered it up. It took
widespread outrage, and many interventions by the president, Joko Widodo
(better known as Jokowi), before Polri held a proper investigation. “This is a
cultural problem,” says Dominique Nicky Fahrizal of the Centre for
Strategic and International Studies, an American think-tank.

Jokowi has paused all football pending a fresh review of stadium security.
The scale of the calamity suggests that someone will have to be held
responsible. The head of Polri has sacked the Malang police boss and
suspended nine other officials from their posts. The 18 cops who fired tear
gas are under investigation. The government has announced it will form a
“fact-finding team”, which will report back to the president within a month
explaining what went wrong and who is to blame.

Yet it will do little to diminish the power of Polri. Jokowi, who entered
politics as an outsider with no military ties, has courted the police even more
than is typical for a president. Polri is “actively building legal cases against
government opponents, silencing critics and persecuting those who threaten
the president’s power”, writes Made Supriatma of the ISEAS-Yusof Ishak
Institute, a think-tank in Singapore. The police expect to receive impunity in
exchange for such favours, says Jacqui Baker, a lecturer at Murdoch
University in Australia. Promising pushes for reform after the Sambo
scandal have lost momentum.

Jokowi’s normally sky-high approval ratings have sagged in recent months,

as inflation bites and voters fume at his cuts to fuel subsidies. Providing
justice for the victims of Malang would be a big boost. But any deeper
reform would be politically difficult. In Indonesia’s flawed democracy, it can
be a dangerous game if the police do not believe you are on their side.■
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spotlight-on-its-police-force
Pantomime politics

India’s Congress party seems determined to prove

its critics right
The Gandhi family and their toadies appear unable to relinquish any
power
Oct 6th 2022 | DELHI

IT SEEMED LIKE a test in a hero’s journey, that ancient Indo-European

narrative form. On October 2nd Rahul Gandhi was delivering a message of
love and brotherhood to his countryfolk in the state of Karnataka when the
heavens opened. Unperturbed, the sodden princeling of the country’s main
opposition party, the Congress, carried on. He was on only the 25th day of
his five-month, 3,570km Bharat Jodo Yatra (Unite India march), a bid to
revive his struggling party as the counterweight to the ruling Bharatiya
Janata Party (BJP) of Narendra Modi, the prime minister. “Neither rain, heat,
nor storms can stop this yatra,” he extemporised.

Alas for Mr Gandhi, his message of unity failed to get through to his own
party members. As he was getting soaked in Karnataka, his family’s
lieutenants back in Delhi, India’s capital, were busy with another round of
the self-sabotage that has hobbled the Congress for years.
The latest brouhaha arose from what was, in theory, a good idea. In August
the party announced that, for the first time in over 20 years, it would hold
elections to choose a new president, rather than allow Mr Gandhi, his sister
Priyanka and their mum Sonia, who have long run the Congress as a family
business, to anoint one. The hope was that a talented politician not called
Gandhi might be able to repair the image of the party, which voters associate
with nepotism and incompetence. It has lost 90% of seats in national
elections in which it directly faced off against the BJP since 2014, according
to a database maintained by Ashoka University near Delhi.

India’s baroque democracy has plenty of strong regional parties which can,
and often do, best the BJP in state elections. But they have little clout or
organising power at the national level. With the next general election less
than two years away, the ability of the Congress to lead a credible coalition
against the BJP is crucial. For all its theatrical dysfunction, it remains the
only other party with a national presence.

Yet its ineptitude at winning elections extends to conducting them, too.

Shashi Tharoor, a charismatic MP and former diplomat who is not part of
the Gandhis’ inner circle, announced his candidacy early on. But it quickly
became apparent that Mrs Gandhi, the matriarch, favoured Ashok Gehlot,
the chief minister of the big, poor north-western state of Rajasthan. Party
rules meant that Mr Gehlot would have had to step down from his post in
Rajasthan before taking over as Congress president. This prompted
resistance from members of his state’s legislature, who opposed the party
high command’s favoured successor for his job. On September 29th Mr
Gehlot withdrew his candidacy, preferring to keep his current powerful job
rather than become a figurehead bossed around by miscellaneous Gandhis.

Mr Gehlot’s sudden exit from the contest left the top brass scrambling for a
replacement. Though the party stresses that the leadership endorses no
candidate, few doubt that Mallikarjun Kharge, an 80-year-old Congress
veteran, is the Gandhis’ man. He will now face off against Mr Tharoor on
October 17th, and will probably win.

Mr Gandhi himself appears equivocal about leading the party. He resigned

from the presidency and handed it back to his mother after losing his seat in
2019. Yet he has failed to nurture talent or create an effective party
machinery. Nor has he used his power to enforce an actual democratic
contest for the presidency. On October 2nd Mr Kharge, cheered on by the
party establishment, suggested to Mr Tharoor that it would be best if the
party found a “consensus candidate”, implying that Mr Tharoor should
withdraw. None of the Gandhis contradicted him. The next day a Congress
bigwig told the Wire, an online news site, that any winner would in any case
be the “lesser” leader to Mr Gandhi.

The farce will roll on for another few days yet. Mr Modi and his supporters,
at least, will get a chuckle out of it. For the many Indians who would like to
see a viable opposition, it is another act in the long-running tragedy of the
Congress party. ■
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prove-its-critics-right
Banyan

What Pacific island states make of the great-power

contest over them
China and America are both trying to woo the tiny countries. They will not
easily be swayed
Oct 6th 2022

TO STRATEGIC PLANNERS in Beijing and Washington, the newest locus

of an intense great-power contest between China and the United States and
its allies is self-evident: the vast southern sweep of the Pacific Ocean and its
island states. The West first grew concerned in 2018, when a government-
directed Chinese bank said it would fund the construction of a wharf in
Vanuatu, north-east of Australia. The government in Canberra, Australia’s
capital, feared it might be a precursor to a Chinese naval base in the region
(it wasn’t). Then, three years ago, Chinese financial and other blandishments
led Kiribati and the neighbouring Solomon Islands to switch their diplomatic
allegiance from Taiwan, with which they had had ties for decades.

This April, China signed a security agreement with the Solomon Islands,
allowing ship visits and the deployment of armed police and military
personnel (if invited), again causing alarm in Australia. In May China’s
foreign minister, Wang Yi, embarked on a tour of island nations in an
attempt to get them to sign up to a “China-Pacific Island Countries Common
Development Vision”—a new geopolitical bloc, in short. Proposals included
closer co-operation on policing and cyber-security as well as freer trade.

America was caught napping. President Joe Biden’s administration has been
trying to make up lost ground since. In July the vice-president, Kamala
Harris, addressed the Pacific Islands Forum, the region’s pre-eminent
grouping, promising deeper engagement. And in late September the White
House launched its first Pacific islands strategy at a two-day summit with
Pacific leaders hosted by Mr Biden in Washington. It involves opening new
embassies and offering $810m in fresh assistance, including help for
protection against unregulated fishing and the impact of rising seas. The
strategy is to incorporate the South Pacific into an “Indo-Pacific” security
framework designed to counter China’s rise.

For all that this unfolding contest seems new to its protagonists, the Pacific
islands themselves remember previous eras when their external relationships
were determined by great powers. In the 19th century Britain and France
competed for Tahiti and the scattered islands of modern French Polynesia.
Germany and Britain struggled for control over Fiji, Samoa and the east of
the island of New Guinea. Americans were behind the Pacific’s first coup, in
Hawaii in 1893 (they annexed the islands soon after).

Japan acquired most of Micronesia after the first world war. The Battle of
Guadalcanal on and around the Solomons’ main island saw some of the
second world war’s most bitter fighting. During the cold war, the Soviet
Union’s fishing deals with Kiribati and Vanuatu provoked the same kinds of
security concerns in the West that Chinese actions do today.

Bearing that history in mind helps with an understanding of Pacific nations’

sense of vulnerability today—and their deep pride. They resent being
played, especially when they are not consulted. Perhaps Mr Wang should not
have been surprised when nations collectively rejected his proposal—China
had not bothered to run it by them.

By the same token, perhaps Western hawks have misread the Solomon
Islands’ security agreement. For all that murky Chinese money seems to
have been deployed to ensure political support for its promoter, the prime
minister, Manasseh Sogavare, his concern was not to interpose his country in
the great-power game but was, rather, domestic: preventing a repetition of
deadly riots in the capital, Honiara, last year.

Judged by the islands’ willingness to sign up to his programme, Mr Biden

has fared better than Mr Wang. But signing up is not much of a commitment,
and certainly no cast-iron vote for an American-led order. After all, trade is
hugely more desirable than aid, and China offers much more potential for
that. Meanwhile, the island states have seen promises of American re-
engagement in the past, including when Mr Biden was vice-president,
amount to little.

Still, Mr Biden has taken a big step by acknowledging that whereas America
sees security in hard-power terms, Pacific islands see it very differently, in
terms of rising sea levels and development. And as a result, Pacific states are
not being treated, as Fiji’s attorney-general put it, as “small dots spotted
from plane windows of leaders en route to meetings where they spoke about
us rather than with us”. That is welcome. But a dismal history does not offer
great confidence that it will endure. ■

Read more from Banyan, our columnist on Asia:

India’s government is exporting its Hindu nationalism (Sep 29th)
Why Narendra Modi criticised Vladimir Putin in Samarkand (Sep 22nd)
South-East Asia’s monarchies struggle with succession (Sep 15th)
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great-power-contest-over-them
China

Interfering elders
Class struggle
Sinifying Shangri-La
Spoiling for a fight
Interfering elders

How retired party officials make themselves heard

in China
Under Xi Jinping, their influence is dwindling
Oct 6th 2022

SONG PING was too young in the 1980s to have been counted among the
“immortals”—a jocular term used at the time to describe Communist Party
veterans who were playing a big role in politics despite having retired.
Perhaps he deserves the title now. At 105 years old, he is still going strong,
making him the doyen of the 20 or so former members of the Politburo
Standing Committee—the apex of party power—who are still alive. Those
fit enough are expected to appear at a five-yearly party congress that starts
on October 16th. How much do such elders matter today?

Like his fellow retired grandees, Mr Song seldom speaks in public. So when
video footage of him addressing a charitable foundation emerged online in
September, it caused a stir on Chinese social media and overseas Chinese
news sites. Some tried to portray it as a rebuke to China’s leader, Xi Jinping.
They quoted Mr Song saying that the only path forward was “reform and
opening”—bywords for the economic liberalisation launched by Deng
Xiaoping in 1979, which has regressed under Mr Xi. That is probably
wishful thinking. The footage provides no evidence that Mr Song uttered
those words. Even if he did, Mr Xi has used the same phrase. Mr Song is
known as a staunch conservative.

Still, the episode is a timely reminder of the potential for former leaders to
cause trouble for Mr Xi, who is expected to be given a third five-year term
as party chief right after the congress, in breach of retirement norms. Public
criticism from an elder such as the widely respected former prime minister,
Zhu Rongji (pictured at the congress in 2017), could be damaging,
especially just before a congress—although Mr Zhu is 93 and rumoured to
be unwell.

There is no sign of a direct challenge to Mr Xi. But as he continues to

support Russia over its disastrous war in Ukraine, and refuses to abandon his
“zero-covid” policy that is crippling China’s economy, many members of the
elite now have reason to be deeply unhappy about their own, and the
country’s, circumstances. Should Mr Xi ever find himself under political
attack, it is more likely to involve the elders rather than a military coup or a
mass uprising, according to many academics, diplomats and others who
study Chinese politics.

One such expert is Joseph Fewsmith of Boston University. “I assume there

are a lot of people at very high levels who really don’t like Xi Jinping, and
covid policy is the obvious attack point,” says Mr Fewsmith. “It doesn’t
strike me as out of the realm of possibility that there could be a number of
retired leaders who might want to coalesce and say something. But
logistically it’s very hard to do.”

For more than three decades after Mao Zedong’s death in 1976, party elders
wielded considerable power. Between 1982 and 1992 they sat on a formal
advisory body. After that was scrapped, some were still allowed to see the
party’s most important secret documents. They regularly met foreign
dignitaries. And they gathered annually with incumbent leaders in the beach
resort of Beidaihe to discuss policy and personnel decisions. Deng remained
hugely influential at least until a year or two before he died in 1997 at the
age of 92.
Since Mr Xi took power in 2012, however, he has curtailed many of the
elders’ perks, anxious to avoid the same fate as his predecessor, Hu Jintao,
who suffered almost constant meddling from his own predecessor, Jiang
Zemin. Mr Jiang (whose early rule had been overshadowed by the elderly
Deng) stepped down as party leader in 2002 but remained military chief
until 2004 and continued to pull strings from behind the scenes long
afterwards.

Mr Xi made it clear he would not tolerate any such interference. In what was
widely seen as a warning to Mr Jiang in 2015, the party’s mouthpiece, the
People’s Daily, advised retired leaders that “once people leave, the tea cools
down”. It accused some elders of trying to promote allies to prolong their
influence, and urged them to “adjust their mentality...so as not to fall into
endless troubles”. Mr Xi’s anti-corruption campaign has targeted several
allies of Messrs Hu and Jiang. Most striking was the downfall of Zhou
Yongkang, who in 2015 became the first former Standing Committee
member to be convicted of corruption. The threat of similar probes into
other elders—or their family members—remains a powerful deterrent.

Under Mr Xi, party elders are thought to live under close surveillance, and
to have to arrange public appearances and meetings with other senior figures
through the party’s General Office, which is currently run by a close ally of
Mr Xi. Many of the most influential elders are now too old to be socially
active anyway. Mr Jiang is 96. He has long been rumoured to be gravely ill.

And yet in one sign of continuing concern about the elders Mr Xi tightened
restrictions on them further this year. In May the party’s Organisation
Department, which manages personnel, published new rules demanding that
retired officials, especially those who held leadership positions, should not
“arbitrarily discuss” policy or spread “politically negative remarks”.

Mr Xi may have allowed the elders a limited say in this month’s leadership
shuffle (several Politburo members are due to retire). For its congresses in
2007 and 2012 the party conducted straw polls of 200 candidates for
Politburo membership. In 2017, however, candidates were instead selected
after face-to-face interviews with incumbents. Mr Xi also sought opinions
from 57 leading figures, including elders, state media said. Elders thus
retained their right to express views, but Mr Xi gained more leeway as he
saw them individually and denied them a chance to join forces or vote, says
a Chinese academic who studies the party’s politics.

The party has not identified the 57 people consulted in 2017. But they are
thought to correspond closely with a body called the Standing Committee of
the Praesidium, which had 42 members at the most recent congress,
including all retirees from the Politburo Standing Committee. It plays a
largely ceremonial role at the congress, overseeing the agenda and election
of a new Central Committee.

Mr Xi will probably have used the same system this year, as it was hailed a
success in 2017, the Chinese academic says. That means elders will almost
certainly be unable to block Mr Xi’s third term but could still influence the
new Standing Committee’s membership by nominating protégés. Mr Xi
could ignore them. But for the moment, he must be wary of humiliating
elders to a point where they feel obliged to speak out, whatever the
consequences. By the next congress in 2027, that should be a lesser concern
as several more senior elders may have passed on.■

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themselves-heard-in-china
Class struggle

How academies for cadres shape China’s ruling

class
Bold, innovative thinking was once encouraged. No more
Oct 4th 2022 | BEIJING

COMMUNIST PARTY congresses are rubber-stamp affairs. The 2,300

delegates who will attend the five-yearly jamboree later this month in
Beijing will have almost no chance of scuppering the decisions—already
made in secret—that will be unveiled at the event. To ensure that they stay
in line, many of them must undergo training. Delivering it is often the job of
a vast system of schools that the party uses to transmit skills and ideology to
bureaucrats.

In recent days, several provinces have reported on lessons being given at

these schools to congress delegates who have no official titles (model
workers, farmers and the like). The classes appear to focus on the need for
loyalty to the party’s leader, Xi Jinping, and on instilling the principle that
“whatever the party asks me to do, I will do”, as one account put it. The
training typically lasts two days.
Normally, however, the students are officials. In a recent paper David
Shambaugh of George Washington University wrote that nearly all of
China’s roughly 50m functionaries, from central government ministers down
to township chiefs, have moved through the training system, usually for
mid-career stints ranging from one week to two years. Mr Shambaugh
described the system, comprising about 7,000 institutions, as a “critical cog
in the machinery” of party control. Subjects taught range from Marxist
theory to the nitty-gritty of public administration. Some even grant degrees,
including MBAs.

The most prominent types are known as party schools. Before Mr Xi came
to power, these sometimes fostered innovative thinking, including in the
political domain. Students talked about how to make the party more
democratic with freer elections for its leaders. Schools often invited foreign
scholars to lecture, even on liberal democracy. At the Central Party School
in Beijing, officials “might be discreet in talking to strangers or in public,
but their internal discussion in class is unbounded”, China Daily, a state
newspaper, enthused in 2011—albeit with hyperbole (party rule itself could
never be questioned).

But Charlotte Lee of Berkeley City College, who has written a book on the
training system, says the schools have since fallen under greater centralised
control, enforced by inspection teams. What freedom party schools might
have enjoyed “has faded”, she says. Mr Xi made this clear in a speech in
2015 at the central school. “On the important principle of upholding the
party’s leadership, we must be very clear-headed, bright-eyed and firm in
our stance, and we must not have any ambiguity or wavering,“ he said. Cai
Xia, an exiled former teacher at the school, says that Mr Xi showed
“dictatorial” tendencies in 2009 when, as the school’s president but not yet
the party’s boss, he warned the faculty against criticising party policies.

The same trend has been evident at schools that specialise in teaching
management skills to bureaucrats. These were set up in the 1980s under
Deng Xiaoping, who wanted to establish a professional civil service and
even (for a while) encouraged efforts to create a wider gap between party
committees and the government apparatus. Under Mr Xi, cadres have been
incessantly reminded that the committees hold sway. As for delegates to the
upcoming party congress, the clear message is that Mr Xi’s will counts more
than anything. ■
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ruling-class
Sinifying Shangri-La

Han Chinese seek spiritual salve in Tibetan

Buddhism
And the Communist Party tries to discourage them
Oct 6th 2022

CHINESE TOURISTS celebrated this summer when it was announced that

Larung Gar would soon be open to visitors again. Many had long dreamed
of seeing the remote Tibetan Buddhist settlement, home to thousands of
crimson-robed monks and nuns living in little red huts sprawled around a
monastic centre in the mountains of Sichuan province. The sight alone could
cleanse one’s soul, bloggers gushed. Too bad, then, that it was closed again a
few weeks later, ostensibly to control an outbreak of covid-19.

Throughout the pandemic the government had been blocking public access
to Larung Gar. It probably has not wanted people to see evidence of its
clampdown on the community, whose population had been growing rapidly
in recent years. Officials had been demolishing parts of the settlement,
evicting many residents and requiring those who remained to undergo
“political education”—meaning being taught to obey the Communist Party.
The authorities’ efforts have not dampened public enthusiasm in China for
what some call “the last pure land in China”. Tourists share tips on social
media about how to circumvent roadblocks around the academy. Just take a
motorcycle up the mountains and then walk in through a back trail, advised
one travel vlogger from the central province of Hunan.

To stifle separatism, the government subjects Tibet to harsh controls. But

Tibetan Buddhism has grown increasingly popular among members of
China’s ethnic-Han majority, most of whom live far from the Tibetan plateau
where Larung Gar is located. Their enthusiasm has been fuelled by Tibetan
efforts to spread their faith. The academy at Larung Gar was founded in
1980 by Jigme Phuntsok, a Tibetan Buddhist master. He wanted to revive
Buddhism across China, where a non-Tibetan form has a centuries-long
history. He gained thousands of followers during a visit in 1987 to
Wutaishan, a sacred mountain in the northern province of Shanxi.

By the late 1990s nearly a thousand Han Chinese disciples were living at
Larung Gar. Mandarin interpreters helped them understand Jigme
Phuntsok’s teachings, which later spread online. Tibetan lamas occasionally
visited disciples in inland China where many Han Buddhists formed study
groups, meeting weekly in private homes, offices and local temples.

Officials often turned a blind eye to such gatherings, regarding Buddhism as

less threatening than Western-backed Christianity or potentially radical
Islam. Few Han followers of Tibetan Buddhism supported Tibetan
independence. Buddhist leaders of Jigme Phuntsok’s sect were also carefully
apolitical. In 2014 Renwu, a state-controlled magazine, featured Khenpo
Sodargye, Jigme Phuntsok’s successor, as one of its “people of the year”.

Today Mr Sodargye is a bestselling author with nearly 3m followers on

Weibo. His writings mostly discuss urban middle-class concerns such as
money, stress and escaping the rat race—topics that are both popular and
politically safe. During a harsh covid-related lockdown in recent months on
the Tibetan plateau, which has triggered much online grumbling, he has
spoken of the need for forbearance.

But the government is becoming more wary. Activists and scholars in touch
with Han followers of Tibetan Buddhism say that the livestreaming of
teachings in Larung Gar and other monasteries has been blocked since mid-
2021. Pressure has been put on home groups to stop meeting. In Shaanxi and
Guangdong provinces, state-affiliated Buddhist associations have banned
“illegal preaching by Tibetan monks”. On the plateau, officials have ordered
clergy not to travel for religious purposes without permission. Han disciples
at Larung Gar, who numbered about 2,000 by 2019, have been forced to
leave. The party is trying to “segregate” Buddhism in China, says Tenzin
Norgay of the International Campaign for Tibet, an NGO.

Ironically, this is happening amid a party campaign to “sinify” religions,

including Tibetan Buddhism. The aim is to make religious leaders and
believers identify with the Chinese “motherland”, Chinese culture and the
party. This has resulted in tighter party controls over every faith. Last
December an article by Zhu Xiaoming, a party scholar of Tibetan affairs,
expressed concern about Chinese believers who, he said, had evolved from
using religion for utilitarian purposes to embracing it for spiritual
sustenance. “The ideological contest between theism and atheism is a
struggle for hearts and minds,” said Mr Zhu. Party members should preach
more atheism and materialism, he said, to win the Chinese people back.

That may prove an uphill battle. Tibetan Buddhism has attracted many
Chinese followers precisely because of their disillusionment with modern
materialism. The point of Buddhism is to escape from the empty suffering of
secular life, says one Han practitioner who asked to be referred to by his
Buddhist name, Puba Duojie.

Like many other Han followers of Tibetan Buddhism, Puba Duojie thinks
Buddhist temples in Han areas have become over-commercialised and too
closely linked with officialdom. He says their teachings have become “like
diluted milk”. Puba Duojie reckons that the government’s efforts to prevent
Tibetans from preaching their faith to Han Chinese will not deter true
disciples or their teachers. The party has existed for only a hundred years.
Lamas believe they are planting seeds of Buddhism that will bear fruit over
many lifetimes. Their patience comes from a much longer-term view. ■

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tibetan-buddhism
Chaguan

Sino-American relations were in trouble long

before Donald Trump
A new book by a veteran scholar explains why
Oct 6th 2022

AS COMMUNIST PARTY leaders tell it, China’s relations with the West
resemble a brawl between heavyweight champions, made vicious by
American cheating. This narrative of grievance has been building for years
and starts at the top. In July 2018, as China reeled under the first blows of
Donald Trump’s trade war, President Xi Jinping hosted European Union
leaders in Beijing. In closed-door discussions with his guests, Mr Xi accused
America of behaving like a fighter in a “no-rules boxing match”. Since then,
Chinese complaints have not been muted by Mr Trump’s defeat and
replacement by President Joe Biden. That is odd, because Mr Biden is a
politician of the old school, whose diplomatic style—truth be told—involves
more back-slapping than eye-gouging.

In part, Chinese grumbling is tactical: a bid to blame bilateral tensions on

America. When Wang Yi, China’s foreign minister, met his American
counterpart Antony Blinken on the sidelines of the UN General Assembly in
September, he urged the Biden administration to “reflect on and change”
what he called its efforts to contain China’s rise. In part, a chin-jutting stance
serves the self-interest of foreign-policy bureaucrats. When Chinese
diplomats portray their country as the victim of Western low blows, and
promise to punch back, they are answering calls from Mr Xi to show
“fighting spirit”. The Chinese foreign ministry can read opinion polls. Lots
of its diplomats know that China’s image has been harmed in liberal
democracies by “wolf warrior” colleagues: foreign ministry spokesmen and
ambassadors who lash out at critics of China on Twitter and in foreign media
interviews. But wolfishness is popular with China’s public. At a recent press
conference on diplomacy in the Xi era, a deputy foreign minister, Ma
Zhaoxu, growled: “Our diplomatic struggle is aimed at words and deeds
harmful to Chinese national interests and national dignity.”

Visions of China and America as two bullies in a ring, in a fight that turned
ugly during Mr Trump’s presidency, are shared by many foreign
governments, notably in the developing world. In Beijing, it is common to
hear diplomats from emerging economies call their countries unwilling
bystanders to an ideological feud that threatens to disrupt trade flows and
create a global split.

It is true that relations worsened in the Trump era. Though seemingly

untroubled by Mr Xi’s autocratic ways (telling China’s leader that he was
right to lock up Uyghurs and other Muslims, according to his former
national-security adviser), Mr Trump saw populist opportunities in telling
American voters that China had stolen their jobs and sent covid-19 in return.
More conventionally hawkish American officials took advantage of Mr
Trump’s combative instincts to enact policies that treated China as a
comprehensive threat to national security.

Yet it is too simple to reduce today’s geopolitical complexities to a slugging-

match begun by two men, Mr Trump and Mr Xi. It is also at odds with
history, as described in a new book, “Overreach: How China Derailed Its
Peaceful Rise” by Susan Shirk, a scholar and former American diplomat
who first visited China in 1971.

Drawing on interviews with Chinese officials, military men and at least one
(unnamed) government minister, Ms Shirk, a professor at the University of
California, San Diego, records how China’s foreign and domestic policies
took a hardline turn as long ago as 2006. That was during the tenure of Hu
Jintao, Mr Xi’s cautious, wooden predecessor, who in his decade as
Communist Party chief had to accommodate powerful factions and interest
groups, like a weak emperor ruling at the pleasure of feudal barons.

Many alarming policies associated with Mr Xi began under Mr Hu. In the

field of foreign policy, these range from sending warships, fishing fleets and
oil-drilling rigs to confront neighbours in the South China Sea and other
disputed waters, to declaring an ever-longer catalogue of Chinese “core
interests” that foreigners may not challenge. At home, the Hu era saw
increased party control over the legal system, stricter censorship, repression
of Tibetans and other ethnic minorities and a greater role for state-owned
enterprises, notably in sensitive technology sectors.

Mr Xi’s revival of one-man rule is blamed for removing checks and balances
on hardline policies, and with reason. But under Mr Hu, control-obsessed
factions, from the armed forces to propaganda and security agencies, took
advantage of weak, collective leadership to advance their interests by
exaggerating threats to internal stability and external security, Ms Shirk
writes. Democratic “colour revolutions” in the former Soviet bloc fed
paranoia about American-led plots. The global financial crisis provoked
nationalist triumphalism about Western decline. The party forgot the advice
of Deng Xiaoping, paramount leader of the post-Mao era, that China should
hide its strengths and bide its time, to create an environment conducive to
economic development.

Bullying foreigners to impress the home crowd

Tests of American strength began long before Mr Trump’s election. His
predecessor Barack Obama sought to work with China on such global
challenges as climate change, and made a point of not condemning its
political system. China did not reward him. Mr Obama had barely been
sworn in when China began harassing American surveillance ships. His first
visit to the country involved multiple snubs. First under Mr Hu then under
Mr Xi, China bullied America’s allies in Asia, Japan and South Korea. It
also broke public commitments to Mr Obama over the militarisation of reefs
in the South China Sea and commercial espionage. Ms Shirk’s sources see
structural causes for this overreach. In the paranoid, secretive world of elite
Communist Party politics, foreign-policy swagger is intended to signal
strength in domestic fights.

The book concludes by describing a better model for competition with the
West: a race in which each side tries to get ahead, rather than a boxing match
designed to hurt or change the other. For now, alas, China’s rulers see more
incentives to fight. ■

Read more from Chaguan, our columnist on China:

How China’s covid policy is like Prohibition in America (Sep 29th)
Xi Jinping won’t ditch Vladimir Putin, for now (Sep 17th)

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long-before-donald-trump
United States

Don’t mind the gap

The Florida model
Viva Las Vegas
Other than that, Mrs Lincoln
Curdling it up
Winter is coming
What Donald Trump understands
Border ordure

The Biden administration is quietly completing

bits of Donald Trump’s wall
The southern border is a political problem for Democrats because it is an
actual problem
Oct 4th 2022 | DALLAS

ON THE CAMPAIGN trail, Joe Biden pledged he would build “not another
foot” of border wall as president. But in the face of record numbers of
migrants arriving at America’s southern border with Mexico, he has quietly
reversed course, agreeing to fill in some glaring gaps that were left when he
abruptly halted construction on his first day in office. Staying mum about
the wall-work, Mr Biden has not wanted to telegraph the decision and risk
alienating backers who associate the border wall with Donald Trump.

That has not stopped Mark Kelly, a Democratic senator running for re-
election in Arizona, from crowing about the news. Mr Kelly says he
deserves credit for “pushing the Biden administration to close barrier gaps”
on Arizona’s border with Mexico and boasts of helping secure $1bn for
border security. He has co-sponsored a bipartisan bill in the Senate to help
recruit and retain more border-patrol agents and give them a pay rise.
What explains the contrast between Mr Kelly’s outspokenness and Mr
Biden’s silence about the wall? Mr Kelly is up for re-election in November
and understands Democrats’ perceived weakness on border security could
cost him votes. Blake Masters, the Republican challenger, has made
Democrats’ mishandling of the border a cornerstone of his campaign.
Although Mr Kelly’s defensive posture appears to be working, with recent
polls showing a healthy lead of around six points over Mr Masters, many
Democrats are not so lucky. According to a recent NBC News poll,
registered voters perceive Republicans to be stronger on border security,
leading Democrats by 36 points, the widest gap on any issue, including the
economy.

November’s midterm election will not be the first in which illegal

immigration and the border have featured prominently. However, in 2022
they are not just a conduit for partisan emotions. The border is a problem for
Democrats because of the sheer volume of people coming and the White
House’s refusal to lay out a compelling federal response. The
administration’s strategy is basically “waiting, thinking that things are going
to get better,” says Henry Cuellar, a Texas Democratic congressman who is
seeking re-election and has been publicly critical of Mr Biden’s handling of
the border.
If anything, the situation is only going to get worse. America’s relatively
strong economy acts as a pull for people suffering from poverty, violence
and inflation. Recent hurricanes will aggravate a looming food crisis in the
Caribbean and further stoke migration. From last October until the end of
August, border officials encountered migrants around 2.2m times on the
southern border, up by a quarter from the year before and more than double
the number of encounters in fiscal year 2019.

Since Mr Biden took office, some 1.5m people have probably been released
into America, some combination of asylum-seekers, people who couldn’t be
sent back to their home country, unaccompanied minors who could not be
detained at length, and others, estimates Aaron Reichlin-Melnick of the
American Immigration Council, a think-tank. Despite tepid assurances by
Kamala Harris, the vice-president, who was tasked with managing migration
from Central America, that “the border is secure”, few believe it.

The nature of border arrivals and deportations has changed too. Many of
those coming are seeking asylum, which they are legally entitled to do.
Whereas migrants used to hail mostly from Mexico and Central America,
high numbers of Cubans, Venezuelans and Nicaraguans are now coming. In
August Venezuelans surpassed Guatemalans and Hondurans as the second-
commonest nationality encountered at the border, after Mexicans. Strained
diplomatic relations with the despotic governments of Venezuela, Cuba and
Nicaragua make it difficult to send people home, so many are being released
into America.

Republican candidates for office so often emphasise the border because it

merges two priorities for Republican voters, immigration and law and order,
says Cal Jillson, a professor at Southern Methodist University in Dallas.
According to recent YouGov polls commissioned by The Economist,
immigration is the second-most important issue to Republican voters, after
inflation, with 12% of them ranking it first, versus a mere 2% of Democrats
doing so. (Democrats say climate change and the environment is their top
priority.) The border has become an embodiment of “the two Americas”,
says Marc Sumerlin of Evenflow Macro, a research firm. “If you watch
MSNBC you’re not going to see it, and if you watch Fox News, you’re
going to see it every day,” he says.
The border is taking on the greatest importance in states that abut it. The
exception is California, where the Republican candidate for governor, Brian
Dahle, does not mention the border on his campaign website, perhaps
believing it is too polarising in a heavily Democratic state.

Not so in Texas, Arizona or New Mexico. Greg Abbott, who is running for
re-election as governor of Texas against the Democrat Beto O’Rourke, has
spent $4bn in state funds on a border-security programme called “Operation
Lone Star” in order to fight “Joe Biden’s open-border policies”. Kari Lake, a
former television anchor who is running for governor in Arizona and has
received Mr Trump’s endorsement, has promised that as soon as she takes
the oath of office, she will declare an “invasion” is under way and deploy the
National Guard. Even in Florida, illegal immigration is a prominent theme in
Mr DeSantis’s re-election bid. He spent $600,000 in state funds to charter a
flight for Venezuelan migrants from San Antonio to Martha’s Vineyard,
prompting an investigation by a sheriff in Texas and Democrats’ calls for a
probe into whether Florida deceived migrants about their destination.

Red states’ busing and flying of migrants to blue states, such as

Massachusetts and New York, is intended to rile up Republican voters and
highlight the burden that housing and feeding new arrivals places on border
communities. Despite the legal blowback, it has worked even better than Mr
Abbott and Co could have imagined. Every time a Democratic mayor
complains about being overwhelmed by small groups of recent migrants
arriving by bus, it amplifies media coverage of the border crisis and offers
an “indirect contribution” to the campaigns of Republican governors like Mr
Abbott, says Mark Jones, a professor at Rice University.

Virtue and signalling

Nearly 2,000 migrants have shown up at Catholic Charities of the
Archdiocese of New York with documents sharing the non-profit’s address
as their final destination, wrongly believing that they can get permanent
shelter there. “This is a national problem and we need to deal with this as a
country,” says Monsignor Kevin Sullivan, the non-profit’s executive
director.
Unfortunately, there is little hope of that. “I don’t see or hear anybody,
whether it’s the governors or the Biden administration, articulating a real,
detailed vision for how to change what’s going on at the border,” says
Theresa Cardinal Brown of the Bipartisan Policy Centre, a think-tank. Ms
Brown points to waves of higher migration than normal at the border since
2014, during Democratic and Republican administrations alike.
Republicans’ obsession with finishing the wall will not resolve today’s
border crisis, since so many asylum-seekers are turning themselves in to
border-patrol officials. Republican promises to “end catch-and-release”
policies is also deceptive. Immigration and Customs Enforcement has some
25,000 beds, a fraction of what is needed in order to detain and process the
multitudes of those arriving before they can be expelled, if that is really
Republicans’ plan.

As for Mr Cuellar, he has asked the Biden administration to show photos of

people who are being deported, as a way to dissuade migrants from coming.
But the administration has refused, because it does not want to upset
immigration activists, according to Mr Cuellar. The result is that the White
House is upsetting Democrats in competitive races instead. ■

For more coverage of Joe Biden’s presidency, visit our dedicated hub and
follow along as we track shifts in his approval rating. For exclusive insight
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quietly-completing-bits-of-donald-trumps-wall
The Florida model

Florida’s government subsidises people living in

hurricane zones
This props up the property market, which state revenue relies on
Oct 6th 2022 | FORT MYERS, FLORIDA

AFTER THE storm come the loss “adjusters”. With clipboard and camera
they tot up the damage from leaky ceilings and waterlogged floors. Blake
Day, an adjuster who represents homeowners in dealings with insurers
throughout south-west Florida, tells his bewildered clients two things.
Photograph everything. And file your claim fast to get paid quickly, for
some insurers will soon be bankrupt.

Hurricane Ian made landfall near Fort Myers on September 28th. About 110
Floridians were killed by the storm. Ron DeSantis, the governor, seems to
have co-ordinated the short-term response well. “The big story is DeSantis
demonstrating management skills, rather than political skills, because most
people assume he is all about politics,” says Susan MacManus, a political
analyst and veteran Florida-watcher. The long-term response is another
matter.
Insured losses from the storm could reach $57bn, estimates Verisk, a
catastrophe-modelling firm. That would make Ian America’s second-
costliest hurricane, after Katrina in 2005. Florida’s booming population and
real-estate prices mean ever-larger losses when disaster strikes. Yet
hurricanes have little effect on the willingness of people to move to Florida.
Its population swelled by 15% between 2010 and 2020. House prices rose by
more than 30% in the past year, twice the national rate.

The reason can be found in actuarial tables. Florida’s property-insurance

market was tottering even before Hurricane Ian. (Property insurance covers
wind damage; flood protection is administered separately, by the federal
government, and has far lower take-up rates.) Annual premiums, at more
than $4,200, are triple the national average. Still that is not enough to cover
risk in the state most vulnerable to storms and sea-level rise. Six firms have
turned insolvent this year, owing to extreme weather, litigation costs and
fraud.

As a result the state is playing a larger role. Citizens Property Insurance, the
state-backed insurer of last resort, has doubled its number of policies in two
years and has the largest market share, about 13%. Its premiums are 30-40%
lower than private carriers’. Increases are capped and subject to state
approval; earlier this year regulators denied Citizens’ request to raise most
rates by an amount allowed by law.

Florida has a big interest in making insurance affordable. Real estate

generates about a fifth of state GDP. Florida has no income tax, so property
tax accounts for a hefty chunk of government revenues. Affordable
insurance, says Zac Taylor of TU Delft University, is the “keystone of the
political and economic structure of Florida”.

The effect of subsidised insurance is that risk—such as coastal development

—is not internalised upfront. Instead costs are redistributed after disasters. If
Citizens cannot cover losses, it can levy a surcharge on almost all other
property- and casualty-insurance policyholders in the state. The so-called
“hurricane tax” was most recently collected between 2007 and 2015, after a
run of bad storms in 2004-05.
Citizens sits on a $6.7bn surplus, more than enough to cover its estimated
losses of $3.8bn from Ian. But its risk exposure will only grow as Ian
bankrupts more private carriers. “That’s going to eat through its capacity
really quickly,” says Charles Nyce of Florida State University.

The state wants to keep the market viable; a concern is that the growing role
of Citizens will undermine private players. In August Demotech, a ratings
agency, dinged four insurers. More than a dozen others were warned of a
similar fate. If downgraded any further that could spell their end: to get a
government-backed mortgage, homeowners must have insurance from an A-
rated carrier. So the state is searching for a less discriminating rating agency
to keep them in business.■
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people-living-in-hurricane-zones
Viva Las Vegas

Tight midterm races in Nevada may hinge on

outreach to Latino voters
Harry Reid’s machine turned Nevada blue. Will it stay that way?
Oct 6th 2022 | Las Vegas

POSTERS LINE the walls of the Democrats’ campaign outpost in east Las
Vegas, a heavily Hispanic area. Signs for Catherine Cortez Masto, an
imperilled Democratic senator, read: “¡Una de las nuestras!” (One of us!). It
is a theme echoed by volunteers making calls to Spanish-speaking voters on
the Latina senator’s behalf. “She can understand our community, and our
culture and language,” offers Antonio Garcia, a volunteer who became a
citizen in 1997 after moving from Mexico.

The erosion of Democratic support among Hispanics in Florida and southern

Texas between 2016 and 2020 has heaped attention upon Latino voters,
especially in swing states with large Hispanic populations. Nearly 18% of
registered voters in Nevada and 19% in Arizona are Latino, compared to
10% nationally. Their electoral power will only grow. A new report from the
Latino Donor Collaborative, a research group, suggests that the number of
Latinos born in America grew by 31% between 2010 and 2020, compared
with 2.8% for non-Latinos. A majority of Latino voters still consistently
support Democrats. But analysis of YouGov data by The Economist suggests
that the average swing voter this year is a young Hispanic man without a
college degree who lives in a city.

Democrats in Nevada are quick to distance the Silver State from the shift to
the right perceived elsewhere. “Latinos in Nevada are not the same thing as
Latinos in Florida,” says one long-time Democratic operative.
Demographically, that is true. Concerns over creeping socialism may help
push Latino voters into the arms of Republicans in Florida, which is home to
vibrant Cuban and Venezuelan communities. But John Tuman, a political
scientist at the University of Nevada-Las Vegas, argues that such worries
don’t resonate as much in Nevada, where most Latino voters are of Mexican
descent.

An analysis from Catalist, a liberal political-data firm, suggests that in 2020

Donald Trump improved on his 2016 performance among Hispanics in
Nevada by eight points, as he did nationally. Voters of Mexican descent,
however, abandoned Democrats less often than other Hispanic groups did in
2020. A recent survey of Latino voters from Pew Research Centre found that
Mexican-Americans were twice as likely to say they would vote for the
Democrat as for the Republican in their local congressional district.

The Senate and gubernatorial races in Nevada are tight. The Economist’s
midterms forecasting model suggests that Ms Cortez Masto, the Senate’s
first (and so far only) Latina member, is neck-and-neck with Adam Laxalt,
the state’s former attorney-general. Yet election night may deliver the winner
wider margins than polls suggest. Nevada is notoriously difficult to poll, as
many voters who work in Nevada’s large tourism industry are transient,
work odd hours and speak only Spanish. “Any poll that you see that doesn’t
have Spanish interviews in it is not a real poll of Hispanics,” says Simon
Rosenberg, a veteran Democratic strategist.

Ms Cortez Masto was elected in 2016 as the hand-picked successor of Harry

Reid, a former Senate majority leader and the most powerful politician in
Nevada’s history. After an unsuccessful run for governor in 2018, Mr Laxalt
helped run Mr Trump’s 2020 campaign in Nevada and advocated for an
Arizona-style “audit” of the results. The outcome of Nevada’s Senate race
may be crucial to winning a majority in the chamber. The result is a
campaign trail that serves as a who’s who of wannabe presidential
candidates. Ron DeSantis, the governor of Florida (and Mr Laxalt’s
roommate in the Navy), and Nikki Haley, Mr Trump’s ambassador to the
UN, have spent time around Las Vegas in recent months.

A majority of Latino voters, like a plurality of Americans, say economic

issues are most important to them when deciding who to vote for come
November. But Latinos are almost evenly split over whether they agree with
Democrats or Republicans on economic policy, according to a recent New
York Times/Siena College poll.

Equis Research, a public-opinion firm focused on Latinos, argues that the

highest rates of undecided Hispanic voters are among those who prefer to
speak in Spanish. Here, Democrats may have an advantage. Over the course
of his 30-year Senate career, Reid built a Democratic machine that focused
intensely on mobilising Hispanic voters. He knitted the state party,
candidates, powerful unions, and non-profit groups into a network to elect
Democrats. Ms Cortez Masto’s phone-bank volunteers in east Las Vegas
were also campaigning for Steve Sisolak, who is running for a second term
as governor, and down-ballot Democrats. Little, if any, English was spoken.
Turnout may also increase this year, as 2022 is the first year Nevada will
mail a ballot to all registered voters.

Republican victories in Nevada’s big races would be even more remarkable

for overcoming the advantages built up by the Reid machine, which lost its
architect when he died last year. “I think if they win, it will probably be on
the concerns around inflation,” says Mr Tuman.■

For exclusive insight and reading recommendations from our

correspondents in America, sign up to Checks and Balance, our weekly
newsletter.
This article was downloaded by calibre from https://www.economist.com/united-states/2022/10/06/tight-midterm-races-in-nevada-
may-hinge-on-outreach-to-latino-voters
Midterm maths

Democrats are losing on the economy, but lead on

other issues
Other than that, Mrs Lincoln
Oct 6th 2022 | WASHINGTON, DC

EACH YEAR Gallup, a pollster, asks American adults which political party
they believe will “do a better job of keeping the country prosperous”. For
most of the middle of the 20th century, a plurality of respondents told Gallup
they believed the Democratic Party would be a better pick on this question.
That all changed in the 1970s. A decade of slow growth, high
unemployment and soaring inflation left the Democrats’ image in tatters.
Ronald Reagan’s presidential campaign proclaimed it was “morning again in
America”. The result was a new decade of Republican dominance on
Gallup’s metric.

Since the 1990s, however, the United States’ two major political parties have
been locked in a bitter battle for voters’ trust to handle the economy.
Democrats have tended to win elections when they had a clear lead on this
question, such as during the financial crisis and in the 1992 election. At
other times they either lost or the elections were close.
This year high inflation, higher borrowing costs and related concerns may
lead them again to the electoral wasteland. According to a new Gallup poll
released on October 3rd, 51% of adults now trust Republicans more with the
economy, compared with 41% for the Democrats. Though Republicans held
the advantage on Gallup’s question for much of the past decade, the gap
between the parties’ ratings is now the widest since 1991.

Folk theories of democracy would have you believe that such a gap would
doom the Democrats in this November’s midterm elections. If the average
voter trusts Republicans to make them more prosperous, surely they would
not deliver Congress back to the hands of the Democrats? After all, what
voter casts a ballot against their own personal prosperity?

The answer, according to a survey carried out for The Economist by

YouGov, an online polling firm, is voters who prioritise other areas of
domestic policy. Each week, YouGov asks 1,500 Americans to pluck from a
list of a dozen or more problems the most important issue for them
personally. Over a third today say that the state of the economy or inflation
is their top concern, followed by roughly 10% each who say they are most
preoccupied with health care, climate change and abortion. Of even less
import to the average American are civil rights (7%), national security (6%),
crime, immigration and government spending (5% each). Fewer than five
out of every 100 Americans name either education, gun control or another
issue as their top concern.

Our polling suggests that the prominence of economic issues has hurt the
Democrats. Among YouGov’s respondents who said the economy or
inflation was their top concern and also predicted they were “definitely” or
“probably” going to vote in November, 63% said they would vote for
Republican candidates for the House of Representatives. Just 28% said they
would vote for Democrats. Yet Democrats lead among those who prioritise
any other issue by 18 points, attracting 55% of their votes to Republican’s
37%.

The salience of abortion has equally been a boon to the left. Whereas just
4% of adults last October said the issue was their top problem, nearly 9% do
now. That group is disproportionately Democratic-leaning; among likely
voters, 75% of them say they will vote for Democrats versus just 21% of
Republicans. That makes for a much wider gap than the advantage
Republicans enjoy on the economy.

We have sliced YouGov’s data to illustrate how issue priority relates to

voting intention. The numbers suggest that if just 20% of likely voters
prioritised the economy above all other issues (rather than the 31% who say
they do), Democrats would be ahead by seven percentage points. Much of
the outcome of November’s midterms may thus rely on whether the
Democrats can make gains among those voters who care about the economy,
or if the state of the economy changes by election day.■

For exclusive insight and reading recommendations from our

correspondents in America, sign up to Checks and Balance, our weekly
newsletter.
This article was downloaded by calibre from https://www.economist.com/united-states/2022/10/06/democrats-are-losing-on-the-
economy-but-lead-on-other-issues
Curdling badgers

Why Wisconsin has such odd politics

The state shows the Democrats’ evolution from a party of union members
to a party of college graduates
Oct 6th 2022 | RACINE AND MADISON

ON A STRIP of well-manicured lawn across from a Walmart supermarket

on the edge of Racine, a modest city in the south-eastern corner of
Wisconsin, a picture of old-school politics is playing out. A couple of dozen
workers, dressed almost to a man in hoodies, jeans and baseball caps, hold
up picket signs from the United Auto Workers (UAW) and call out to drivers
who toot their horns in support. The group are part of several hundred
workers from the CNH Industrial tractor factory just down the road, who
have been on strike since May, demanding higher wages, more holiday time,
and better health insurance.

Through the crowd walks Mandela Barnes, Wisconsin’s 35-year-old

lieutenant governor and the Democratic candidate for Senate. In a short
stump speech noting his father’s long membership of the UAW, he
denounces the firm (whose biggest shareholder is Exor, which also owns
43% of The Economist). “Nobody builds a successful company without a
strong union workforce,” he says. So far, however, the strike has not been
especially successful. “They think they’ve got us over a barrel, and they
really don’t,” says Michael Tenuta, who has worked at the firm for the past
11 years. The problem, ironically, is that factories nearby have been raising
wages sharply. And so even as on paper, the workers’ position gets stronger,
the union itself is getting weaker as its membership drifts away to better-
paying jobs elsewhere.

That decline of union power is one of the reasons why Wisconsin has drifted
away from Democrats in recent years. Twenty years ago, the state had
significantly higher union membership than most of America; now it has
significantly lower. Having been won comfortably by Barack Obama in
2008 and 2012, in 2016 it narrowly voted for Donald Trump, before
swinging back marginally to Joe Biden in 2020.

And yet, even as the Democratic-leaning blue collar workforce shrinks, the
Democratic vote is growing elsewhere. The following day, Mr Barnes spoke
to a rather different crowd, mostly composed of smartly-dressed women, in a
diner in Madison, the state capital. There, instead of stressing his father’s
union membership, he instead talked about his mother. Before he was born,
she had to terminate a complicated pregnancy. “I probably wouldn’t be here
if my mother didn’t have the right to make choices about her health care,” he
said, to cheers.

It is thanks to that growing vote that Mr Barnes, a black progressive with a

long history of left-wing stances, still has a chance of unseating Ron
Johnson, the Republican incumbent, in November. It also makes Wisconsin
a rather unusual sort of state, that nonetheless illustrates well the
transitioning Democratic voter base.

On the one hand, it retains a large blue-collar workforce—19% of the state’s

GDP comes from manufacturing—who have been drifting more towards
Republicans in recent years, making the state look more like Indiana or
Ohio, which are now both solidly Republican. On the other hand, it also has
a vast and growing progressive vote, particularly around Madison, the home
of the largest University of Wisconsin campus. About 7% of the state’s adult
population consists of students, who are well organised, and who this year
especially, have been fired up by the Supreme Court’s decision to undo
abortion rights (it helps that Wisconsin now has, by virtue of a law passed in
1849, one of the strictest bans on abortion in the country.)

This helps to explain why the Badger State is so weird. Essentially, when
Democrats can motivate their electorate (which also includes the large black
population of Milwaukee, and a surprising rural redoubt in the north-west)
they can win. The state’s junior senator, Tammy Baldwin, is a lesbian
progressive who wants America to introduce universal health care. But when
they fail, Republicans, with their more unified base, can also get in their own
radicals. Mr Johnson thinks global warming is fake, covid-19 vaccines are
dangerous, and that the Trumpist riot on January 6th 2021 was no big deal.
Only six other states have senators from both parties, and none where the
two differ as starkly. Mr Johnson has campaigned almost exclusively on
crime, painting Mr Barnes as a black radical who wants to defund the police
(Mr Barnes denies that, but he has in the past tweeted vociferously attacking
cops).

Overall, polls suggest Mr Johnson is still the favourite. Lower turnout, a

feature of off-year elections, favours Republicans. But not least thanks to
that messy Democratic electorate, Wisconsin is a tricky place to survey. An
unexpectedly large turnout could swing it the other way.

Indeed, in some ways the state has always been odd. In 1962, the state
elected Gaylord Nelson, an early environmentalist and opponent of the
Vietnam war. Two years later, in the presidential primaries, a large share of
the very same electorate plumped for George Wallace, Alabama’s
segregationist governor. Whatever Wisconsinites decide to do in November,
it will be an indicator of both the opportunities the Democrats have and the
challenges they face making the most of them.■
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politics
Winter is coming

Alaska’s Fat Bear Week proves conservation can

be joyful
Katmai National Park finds a competitive way to teach people about
wildlife
Oct 4th 2022 | Los Angeles

FOR ONE rabid corner of the internet, October is Octobear. On October 5th,
Katmai National Park & Preserve in southern Alaska kicked off Fat Bear
Week, when the park’s brown bears are pitted against each other in a bracket
challenge much like college basketball’s March Madness tournament. Fans
use before and after photos to vote for the bear they think has gained the
most weight over summer to prepare for hibernation. But what began as a
niche contest for conservationists has become a global campaign where
superfans stump for their favourite chunkster to be crowned the fattest of
them all.

Fat Bear Week began in 2014 as Fat Bear Tuesday. Mike Fitz, a former park
ranger at Katmai, noticed that live webcams showing the bears generated a
lot of online comments. He and the other rangers let people vote for their
favourite fat bear on Facebook. The one-day event attracted just 1,700 votes
in 2014. Last year’s week-long contest elicited nearly 800,000. Like its
basketball progenitor, fans join office bracket pools and gather to watch the
live bear cams set up around the park. Some go further. Jean Gross is hosting
a bear-themed potluck where she lives in Northern Michigan. Guests must
bring foods that appeal to both bears and humans, such as salmon patties and
honey butter. This year Ms Gross says she is rooting for Holly, an older
female, because “she is a nice little fat girl and so am I”.

The contest serves two purposes besides gushing over the rotund ursids.
America’s national parks are often in remote, undeveloped areas. They can
be difficult and costly to travel to. Fat Bear Week brings Alaska’s pristine
wilderness to fans’ computer screens. “The webcams help to democratise the
experience,” says Mr Fitz, now a naturalist for explore.org, which operates
the bear cams. “It’s not limited to the fortunate few who can go to the river
any more.”

Second, Fat Bear Week heaps attention upon the bears, and the ecosystems
they inhabit. The 2,200 bears of Katmai are so husky because they feed from
one of the healthiest salmon runs in the world, says Sara Wolman, a former
park ranger. Salmon in the Pacific Northwest have suffered due to
overfishing, dam construction and warming rivers due to climate change.
Brooks River, where Katmai’s bears like to fish, has so far dodged these
threats.

Creators and fans of Fat Bear Week argue the contest has gone viral because
it is a conservation success story that for one week helps dispel feelings of
doom about habitat loss and climate change. “Maybe things aren’t super
great all the time in the world,” says Felicia Jimenez, a current Katmai
ranger, “but there’s some really fat bears in Alaska.”■

For more coverage of climate change, register for The Climate Issue, our
fortnightly newsletter, or visit our climate-change hub.
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conservation-can-be-joyful
Lexington

What Donald Trump understands

He has a grim view of human nature, and he exploited it shrewdly—to a
point
Oct 3rd 2022

DONALD TRUMP has always understood how the world works—or, at

least, how it can be made to work—better than his opponents. Maybe
because he has such qualities himself in abundance, his appreciation for
human greed, cowardice, selfishness and other weaknesses has given him a
granite confidence in human corruptibility. Across the decades, and
throughout his term as president, that faith has been vindicated more often
than it has been confounded.

“History isn’t kind to the man who holds Mussolini’s jacket,” Senator Ted
Cruz of Texas told an associate in 2016, explaining why he was not
endorsing Mr Trump, according to the new book “Confidence Man”, by
Maggie Haberman. Yet Mr Cruz eventually bent the knee—even though Mr
Trump had attacked his wife, Heidi, so cruelly that even a Republican not
named Cruz also said he could not back him. That Republican, Rudy
Giuliani, would go on to make a bonfire of his reputation in service to Mr
Trump.

How could a man who lies so transparently and exhibits such incompetence
be so successful? Respectable people have been asking versions of that
question since Mr Trump was in real estate, and as he moved on to
entertainment and politics, or to all three at once. The answer says as much
about them, or about all of us, as it does about him.

Ms Haberman, of the New York Times and CNN, stands out among
journalists who have followed Mr Trump, and not only because she has
covered him since he was a developer in New York and she was at the New
York Post, a tabloid. Ms Haberman has always taken Mr Trump seriously, as
someone, she writes here, who was “shrewd and smarter than his critics gave
him credit for, possessed of a survival instinct that was likely unmatched in
American political history”.

Ms Haberman makes a particular contribution with this book by describing

how the annealing interplay of politics and commerce in the New York of
the 1970s and 1980s equipped Mr Trump with the low expectations and
cynical convictions that would carry him so far: that racial politics is a zero-
sum contest among tribes; that allies as well as enemies must be dominated;
that everything in life can be treated as a transaction; that rapidly topping
one lie or controversy with the next will tie the media in knots; that celebrity
confers power; that not only politicians but even prosecutors are malleable.

Yet these same convictions would also carry Mr Trump only so far. They
doomed his presidency. After Mr Trump was elected, James Comey, the FBI
director, warned him that a dossier was circulating that alleged Mr Trump
had compromised himself in Russia. New York had taught Mr Trump that
damaging information was a means of leverage, and so he assumed Mr
Comey was threatening him. “Comey was blind to the depths of Trump’s
paranoia and to his long history of gamesmanship with government
officials,” Ms Haberman writes. Mr Trump would later fire Mr Comey, with
disastrous repercussions for himself. The first exchange “set the terms” for
Mr Trump’s subsequent interactions with intelligence and law-enforcement
officials, according to Ms Haberman.
Mr Trump bullied and humiliated senators and generals. “You’re losers and
you’re babies,” he told America’s military leaders, when they brought him to
the Pentagon in an attempt to persuade him of the value of the post-war
order. He could reward servile lawmakers by tossing branded chocolate bars
at them, then have the satisfaction of watching as they scrambled for one.
But he found that foreign affairs and even domestic politics could not be
managed only through bilateral transactions and tactical improvisation, and
that his money could not buy everything. He was astonished when a New
York Democrat he had donated to years earlier nevertheless backed his
impeachment.

Because Ms Haberman sees Mr Trump in full, she acknowledges “the Good

Trump”—the one who would repeatedly check on a sick friend and be
“funny and fun to be around, solicitous and engaged”. People accustomed to
his all-caps Twitter persona or to press portrayals were often surprised on
meeting him in the White House. He could be calm and charming. But that
side of Mr Trump was less in evidence as his term wore on. During the 2020
campaign, Bill Barr, then the attorney general, pleaded with Mr Trump to
turn on his charm, “to persuade people that you’re not an asshole”. But Mr
Trump insisted his core voters “want a fighter”.

Defining deviancy down

That mania about his political base also set limits on Mr Trump. In 2018,
after a 19-year-old man killed 17 people at a Florida high school, he met
with parents and students from the school and promised action on gun
control. “We’re going to get it done,” he said, and he could have. But he
backed away after talking with officials from the National Rifle Association.
Ms Haberman says her subject does not have a high opinion of his core
supporters. ( “They’re fucking crazy,” he told his own aides.) But as an
upstart from Queens he became persuaded in his New York days that the
establishment would never accept him, and he would not take the risk of
alienating his base by shifting toward the political centre.

Inevitably, “Confidence Man” must walk some well-trod paths, as when Mr

Trump magnified his notoriety by questioning whether Barack Obama was
born in America. The heart sinks to be reminded of all the Trump-era
scandals, if only because one suspects we have lost the capacity for shock
when, say, a candidate refuses to release tax returns. Ms Haberman rightly
laments Mr Trump’s influence, writing that he “appeared to be ushering in a
new era of behaviour, real and expected, from politicians”. Her devastating
portrait of Mr Trump’s failure should give his imitators pause. He did not
escape his own history, but other Americans certainly still can, given a
leader with the wisdom to build on their strengths rather than prey on their
weaknesses. ■

Read more from Lexington, our columnist on American politics:

John Fetterman is a canny politician (Sep 29th)
There is plenty of good news about American government (Sep 22nd)
How the left and J.D. Vance learnt to despise each other (Sep 15th)

For exclusive insight and reading recommendations from our

correspondents in America, sign up to Checks and Balance, our weekly
newsletter.
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Middle East & Africa

Land of dashed hope

Let’s get this party started
Coup upon coup
Blue-sky blues
A protest song rocks a theocracy
Dashed hope

Eritrea has called up thousands of reservists to

fight in Tigray
The escalation complicates efforts to end Ethiopia’s senseless civil war
Oct 6th 2022

FOR YEARS he counted himself lucky. Tekle (whose name we have

changed for his safety) had gone through his training in the Eritrean army
and learned how to handle a gun. Then he was released, unlike most of his
classmates who had been conscripted for indefinite national service in the
army or in virtual slavery for the state. Many others fled the country. Tekle
stayed put, one of the few people allowed to run a private business in
Eritrea’s capital, Asmara. He kept his head down.

But Tekle’s luck ran out in September when Eritrea’s dictator, Issaias
Afwerki, called up reservists aged 40-65 to fight against Tigray, a rebel
region of next-door Ethiopia. Probably tens of thousands have already been
sent into battle there. “Nobody wants to fight,” he says in resignation. “But
life is not fair sometimes.”
Eritrea’s mobilisation marks a new chapter in Ethiopia’s bloody civil war,
now about to enter its third year. It dashes hopes of a peace deal between the
Tigrayan People’s Liberation Front (TPLF), which runs Tigray, and Abiy
Ahmed, Ethiopia’s prime minister. The needless conflict, which pits the
TPLF’s self-styled Tigray Defence Force (TDF) against Ethiopian federal
forces backed by allied militias and Eritrean troops, has taken thousands of
lives since a five-month truce ended in August. Millions of civilians in
Tigray are under blockade. Hundreds of thousands may be starving. Almost
no food or medicine has come in since the fighting resumed.

It is hard to gauge the full extent of the suffering or to assess independently

what is happening on the front, because the government has blocked
telecommunications across Tigray and prevents journalists from travelling
there. Yet it is clear that Eritrean troops are fighting alongside Ethiopian
ones in several places. The most significant of these is in the north-west of
Tigray near the towns of Sheraro and Dedebit, the symbolic home of the
TPLF, which began there as a guerrilla movement in the 1970s (see map).
Eritrean forces have also been shelling Tigray at various other points and
have reportedly tried to attack Tigray’s capital, Mekelle, from the east via
the Afar region.
The TDF claims to have inflicted huge losses on Ethiopian forces at Dedebit
and to have halted an offensive towards the strategic town of Shire. “We’re
starting to see the light at the end of the tunnel,” says Mulugeta Gebriwot, a
former TPLF leader currently in Mekelle. “They’re losing division after
division on the north-western front.” On September 28th the TDF also
claimed to have wiped out five mechanised Eritrean divisions in Afar. This
seems unlikely since Eritrea has not got much armour—unless it has
recently been resupplied from abroad.

The TDF’s claims are also hard to square with its recent setbacks. Eritrean
troops have captured Sheraro, though Tigrayan sources say they are planning
a counter-attack. On October 3rd the TDF said it was retreating from the
Amhara region to free up troops needed elsewhere. Overall, the TDF
appears to be holding its ground on most fronts, reckons a Western diplomat.
“But I can’t imagine they’re not going to face supply issues soon,” he added.

The Tigrayans hope to bleed Ethiopia dry. “The war will stop when they
don’t have numbers to fight,” says Mulugeta. Yet even without the
thousands of conscripts being sent from Eritrea by Issaias, Ethiopia has no
shortage of potential troops. After all, it has a population of about 110m
people to Tigray’s 6m. It has better equipment, including armed drones,
which it uses to attack TDF supplies and heavy weapons (as well as
civilians, from time to time). And it has allies, such as Turkey and the
United Arab Emirates, which may be willing to resupply and re-equip it.

“We are very bullish,” says an official in Ethiopia’s ruling party in Addis
Ababa, Ethiopia’s capital. At secret peace talks in Djibouti in September
Ethiopia rejected a TPLF offer of a “cessation of hostilities” in exchange for
lifting the blockade and returning land. The government’s plan, suggests the
official, is rather to capture Mekelle and install a friendly administration
there—an ominous prospect, given that its previous failed attempt to do this
involved large-scale looting, murder and rape.

Tigray’s gambit seems to be to try to push across to the border with Sudan
by recapturing territory it lost at the start of the war. “We will definitely take
western Tigray,” says Getachew Reda, the TPLF’s spokesman. Doing so
would open up a supply route to ease the blockade and possibly force Abiy
back to the negotiating table.
Much would then depend on how Sudan responds. Since the Sudanese junta
is not on good terms with Abiy’s government, the Sudanese army has been
providing covert assistance to Tigray, for instance by letting a TDF unit
organise and train inside Sudan. But overt intervention by Sudan could draw
it into confrontation with both Ethiopia, which Sudan accuses of wanting to
grab some of its territory, and Eritrea, which has a history of supporting
Sudanese rebel groups. “The question is: will the Sudanese actively
engage?” asks a European diplomat.

Abiy’s government has agreed to meet the TPLF in peace talks organised by
the African Union. Both ought to want a deal. Tigray is starving. Ethiopia’s
economy is tanking and public support for the war is dwindling. Inflation is
close to 30% and sources close to the central bank reckon that Ethiopia’s
foreign reserves cover just three weeks’ worth of imports. “Business is
slowing,” sighs a bank manager in Addis Ababa. “The TPLF and the
government need to stop the war and negotiate.”

Yet Eritrea’s Issaias, who was not invited to the talks, may try to spoil any
peace deal before it is reached, since he sees the TPLF as a threat to his own
rule. Moreover, his paranoia is kindled by the TPLF‘s hints that it may
indeed march on Asmara to topple him. “As long as both Issaias and the
TPLF are in power, the war will not stop,” says the hapless Tekle, now
miserably waiting to be ordered to the front. ■
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thousands-of-reservists-to-fight-in-tigray
Let’s get this party started

Why political parties are a growth industry in

Lesotho
There are few better ways to make a living than founding one
Oct 6th 2022 | JOHANNESBURG

LESOTHO IS A gold mine for pub-quiz crafters. It has the highest lowest
point of any country in the world, and, as it happens, the highest pub in
Africa. It is one of just three countries entirely encircled by another—in its
case, South Africa. (San Marino and Vatican City are the others.)

Less whimsically, Lesotho’s economy is nearly a tenth smaller than in 2016

and its 2.2m people are poorer than the average sub-Saharan African. The
more than two-thirds who live off the land face erratic rains and climate
change. Factories built by Taiwanese and Chinese firms in the 1990s to
make clothes for Americans are shedding jobs. A huge dam to supply its
neighbour with water is delayed.

There is one booming sector, though: political parties. “It is one of the only
growth areas,” notes John Aerni-Flessner of Michigan State University.
Some 65 were registered for elections on October 7th, up from 27 in 2017.
Scholars reckon that in Lesotho the number of parties, relative to population,
is among the world’s highest.

One reason is that barriers to entry are low. To set up a party takes just 500
signatures. Under Lesotho’s version of proportional representation, a party
does not have to reach a minimum share of the vote to be granted seats in
parliament. In any case, candidates have few ideological or ethnic
differences. Once in parliament there are no rules against MPs joining other
parties or forming new ones. Coalition governments are ephemeral. Political
entrepreneurs thus have every incentive to found their own parties. In 2015
one got a mere 1,900 votes and its leader ended up in the cabinet.

What makes a political career attractive in the first place is the lack of
economic alternatives, besides looking for work in South Africa. “The only
available means of survival is to be close to the state,” says Motlamelle
Kapa of the National University of Lesotho (NUL). Public spending is more
than 50% of GDP, a higher share than elsewhere in southern Africa.

Much of it is wasted. “Corruption is rampant in Lesotho,” says Mamello

Rakolobe, also of the NUL. Local reporters highlight dodgy schemes. There
are allegations that MPs illegally occupied land they sold to cannabis farms
and that a minister was involved in a plot to pass off imported kangaroo
meat as beef.

The battles for spoils mean that politics in Lesotho is rarely dull. After
elections in 1998 the prime minister asked Botswana and South Africa to
send troops to quell riots. It did not go well. Much of the capital, Maseru,
was burned or looted. In 2014 the army botched a coup against Thomas
Thabane, then the prime minister. In 2020, after a spell out of office, he quit
after his third wife was accused of killing one of her predecessors. A year
later he was charged, too. (In July all charges were dropped.) Mr Thabane’s
successor, Moeketsi Majoro, will step down after the elections because he
has lost the support of his party.

Some Basotho (as the locals are known) have tried to overhaul their politics.
In 2019, pressed by South Africa and local activists, Lesotho set up the
National Reforms Authority (NRA), which proposed fixes to structural
problems. Parliament was meant to pass a bumper bill based on its ideas
before the election. But politicians had other plans. They stalled for so long
that the session expired. Under renewed pressure from donors, Mr Majoro
declared a state of emergency and recalled parliament. MPs came back and
passed an increase in their pensions. A court then ruled the state of
emergency unlawful, leaving the NRA’s reforms in the cold.

In a recent poll by Afrobarometer, a research group, 86% of Basotho said the

country was going in the wrong direction. More approved of one-party rule
(55%) or rule by the king (69%), currently a figurehead, than the status quo
(49%). Just 26% said they were satisfied with their democracy—half the
average for democracies in sub-Saharan Africa. Elsewhere in Africa, says
Khabele Matlosa, an academic, demand for democracy outstrips supply.
“Lesotho is the only country where supply is higher than demand.” There
may be an abundance of political choices for Basotho voters. But not one of
them is appealing.■
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are-a-growth-industry-in-lesotho
Not a chance in Sahel

For the second time this year, soldiers stage a coup

in Burkina Faso
Jihadists are wreaking havoc. More army infighting will not help
Oct 1st 2022 | ABUJA

AT FIRST GLANCE the images of soldiers in a television studio on

September 30th, some of them masked and bristling with guns, were almost
indistinguishable from those broadcast in Burkina Faso in January, when the
army overthrew Roch Kaboré, the elected president. Yet this was a different
coup. Eight months ago the leader of the first Burkinabé putsch of 2022,
Lieutenant-Colonel Paul-Henri Sandaogo Damiba, sought to justify it by
saying that the government was failing to defeat jihadists who had overrun
much of the country. This time Captain Ibrahim Traoré used much the same
reasoning.

Burkina Faso is, indeed, struggling badly in its fight against jihadists loosely
affiliated to al-Qaeda and Islamic State. By mid-September over 3,100
people had been killed in the fighting this year, a third more than in all of
last year. Nearly 2m people have been forced from their homes overall. Yet
the two coups seem to be setting Burkina Faso on a similar path to that of its
neighbour, Mali, which is teetering on the edge of chaos and is shunned by
others in the region after coups in 2020 and 2021.

Colonel Damiba, an experienced officer, had raised expectations that he

could make the country safer. Instead, the army has floundered. Soldiers
complain of inadequate kit and support. Jama’at Nasr al-Islam wal Muslimin
(JNIM), an al-Qaeda offshoot, controls large swathes of territory, including
towns such as Solenzo in western Burkina Faso, says Héni Nsaibia of
Menastream, a risk consultancy. Perhaps reflecting the army’s divisions, on
September 12th Colonel Damiba sacked his defence minister and took the
role himself. Two weeks later a 150-truck convoy carrying supplies was
wiped out by jihadists.

During the coup troops surged onto the streets of Ouagadougou, the capital,
firing their weapons, even as the army was supposed to be conducting a big
anti-jihadist operation. Soldiers who spend their time scheming presumably
have little left for stopping terrorists.

The coup is likely to deepen Burkina Faso’s isolation from democratic

neighbours such as Ivory Coast and Niger, whose help the country
desperately needs to police its porous borders. Colonel Damiba had agreed
only in July with the Economic Community of West African States
(ECOWAS), a regional bloc, to return Burkina Faso to civilian rule in March
2024. That deadline will surely be missed.

The latest putschists tried to justify their act by lambasting “red tape”—
hardly a reason to storm the national broadcaster. They also claimed Colonel
Damiba had failed to bring security. Yet eight months is barely enough time
to organise a wedding, let alone end an insurgency. This was Burkina Faso’s
11th coup or attempted coup since 1946. Few have brought stability.

The coup raises questions over the future of for Burkina Faso’s military co-
operation with France, which has a special-forces base on the edge of
Ouagadougou and worked closely with Colonel Damiba. After the coup,
protesters attacked the French embassy amid accusations that France was
harbouring the colonel, who appeared in Togo days later. Captain Traoré
may well turn from France to Russia (he says he will call in any power that
is “willing to help”). Some putschist soldiers waved Russian flags. The
captain should think twice. In Mali, where Russian mercenaries from
Wagner Group have replaced French forces, security has grown worse.
Russian gunmen have been accused of involvement in atrocities.

Before the coup, Colonel Damiba was trying to hold peace talks with
jihadist groups, with the aim of demobilising rebel fighters. Captain Traoré
emphasises fighting over talking: he thinks the army should be reorganised
for “counter-offensives”. He criticised the “political adventures” of his
predecessor, whose “risky choices” had weakened Burkina Faso’s security
system.

ECOWAS declared the coup “inopportune”. More candidly put, it is the

latest grim sign that jihadists are winning both on and off the battlefield in
the Sahel, and that Burkinabés will continue to suffer. ■
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this-year-soldiers-stage-a-coup-in-burkina-faso
Blue-sky blues

Lebanon’s economic crisis is wrecking the

environment, too
Generators spew toxins into the air, while sewage pollutes the water
Oct 6th 2022 | BEIRUT

NOSTALGIA IS POWERFUL in Lebanon, a country whose population is

dwarfed by its diaspora. Ask Lebanese expats to describe home and they
may offer sweet memories: the scent of jasmine and cedars, of coffee spiced
with cardamom and of manaeesh (flatbreads) fresh from the oven; the sound
of Fairouz, a beloved chanteuse, warbling from cafés and car radios.

Three years into an economic crisis, though, the defining sensory experience
of Lebanon is the smelly, noisy diesel generator. The machines run at all
hours, providing power that the state cannot. The air takes an acrid tinge;
their roar keeps people awake at night. And they are perhaps the most telling
sign of how economic collapse is harming Lebanon’s environment.

GDP has shrunk by more than half, from $52bn in 2019 to $22bn in 2021.
Though still officially pegged at 1,500 Lebanese pounds to the dollar, the
currency actually trades at around 38,000; the finance ministry says it will
soon adjust the official rate. Annual inflation has been above 100% for the
past 26 months in a row. Most banks are bankrupt and allow depositors to
withdraw only pocket money every month.

Public services have ground to a halt. Ministries have run out of paper and
ink. Many civil servants no longer show up for work: getting there costs
almost as much as their salaries. One research group estimates that the
average teacher earns just $3 a month after commuting costs.

Desperate people are increasingly trying to flee across the Mediterranean.

Last month a boat packed with migrants capsized soon after it set sail from
northern Lebanon. At least 100 bodies, many of them Lebanese, were
washed ashore in neighbouring Syria.

For those who remain, economic crisis is causing environmental catastrophe

as well. Start with the air. Even in better times Lebanon did not provide
round-the-clock electricity. Citizens used diesel generators to fill the gaps—
three hours a day in the capital, longer elsewhere. This is an especially dirty
way to generate power. A study conducted in 2012 in Hamra, a
neighbourhood in west Beirut, found that the level of airborne carcinogens
jumped by 60% during the hours of generator use.

Today, with barely any fuel to run power plants, the situation has reversed.
The state provides at best two hours of power. Generators roar around the
clock, in car parks and garages and wherever else they can be stashed.
Sometimes they catch fire from overuse. Many buildings have scheduled
“rest” hours to allow for cooling and maintenance; a few have backup
generators for their backup generators.

They are spewing loads of cancer-causing chemicals into the air.

Researchers at the American University of Beirut estimate that the level of
toxic emissions has jumped three-fold since before the crisis. They think
Lebanon’s incessant generator use will mean an extra 550 cancer patients
and 3,000 cases of chronic obstructive pulmonary disease each year.

Power plants are getting dirtier, too. One of them, Zouk, sits close to a
populated area, its smokestacks looming over nearby beach clubs. As it was
running out of fuel, the authorities decided to load a shipment of heavy fuel
oil that had been in storage. When it arrived, they deemed it too dirty and
viscous to use but, with no alternative, they still loaded it into the plant.

Water has become poisonous, too. Lebanon’s infrastructure was a mess

before the crisis. Many homes were either not connected to the grid or
suffered regular outages. So they relied on lorries to supply water for bathing
and washing; those who could afford it bought bottled water to drink. Fewer
people can afford anything now. UNICEF, the UN children’s fund, says the
price of trucked water has increased six-fold since 2019.

With little money for maintenance and little electricity to run treatment
plants, what water does arrive is often polluted. Hepatitis A, commonly
spread by infected faeces, is rife. In the first half of the year authorities
logged 555 cases, more than usual. The health ministry blamed collapsing
infrastructure: sewage seeps into the water people drink. The health service
is ill-equipped to handle these consequences. Hundreds of doctors and
nurses have emigrated. Hospitals and chemists are short of medicine,
especially cancer drugs, which many patients cannot afford anyway.

Lebanon aims to produce 30% of its electricity from renewables by 2030.

Some joke the country will get there much faster: “We’ll be the world’s first
zero-emissions country when we have no fuel,” quips an economist. Stand
on a balcony and gaze out over Beirut’s skyline, and solar panels seem to be
everywhere. Engineers who install them have one of the few booming
businesses in Lebanon—although, at around $3,000 for a five-amp system,
not many people can afford them.

In any case, regulations barely exist. Many solar systems are put in on the
cheap. Equipment is imported, sometimes from dodgy suppliers. Installers
are not always properly trained. There are fears that shoddy wiring will start
fires or that winter storms will blow solar panels off rooftops. For a failed
state mired in economic crisis, even the sun has a dark side. ■
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crisis-is-wrecking-the-environment-too
An anti-ayatollah anthem

Iran’s repressive regime is being rocked by a song

“Baraye” lists 28 reasons why clerical rule is uncool
Oct 6th 2022

THE PROTESTS against the shah of Iran were in their infancy in the
autumn of 1978 when Mohammad-Reza Shajarian, a famous singer, stirred
the hearts of millions with a song called “Jaleh Khoon Shod” (“The dew
turned to blood”). It became an anthem of the revolution that soon toppled
the monarch. “Bring down the reign of madness,” he crooned.

Nowadays a new chant is catching on. Shervin Hajipour’s song, “Baraye”,

meaning “for”, is no more than a string of tweets. Inspired by the death of an
“improperly veiled” 22-year-old Kurdish woman in the custody of the
religious police three weeks ago, each tweet gives a reason why people
should rebel—“for dancing in the streets”, “for our fear when kissing”, “for
my sister, for your sister, for our sisters”.

The songster chants a litany of 28 grievances, ranging from the degradation

of Iran’s environment, to poverty and repression. In essence, his song is a
cry for Iran to become a normal country.
Mr Hajipour puts the blame for Iran’s ills squarely on the clerics. “For all
their meaningless slogans,” he laments. “For the girl who wishes she’d been
born a boy.” His lyrics chime with a society, long alienated from theocratic
rule, that has become increasingly secular.

Few had heard of Mr Hajipour before. He studied economics at a provincial

university on the Caspian Sea. By the time of his arrest on September 29th,
less than 48 hours after he had put his song on Instagram, it had been heard
40m times. His jailers made him remove it but it was already beyond their
control.

Women sing it in the face of riot police who come to club them. Schoolgirls
chant it in classrooms and write its lyrics on their whiteboards. Commuters
play it on their car stereos in the morning rush hour and blare it out through
the night from their housing estates after work. Iranian exiles sing it as they
march through the streets of cities in Europe and elsewhere.

Beatings, arrests and shootings have failed to silence the anthem. It has
helped turn the anger that swelled at the excesses of the morality police into
a nationwide demand for regime change. Since the reopening of universities
on October 1st, campuses have also resounded to cries of “death to the
dictator”, often led by women.

The authorities seem to be dithering, as they did in the last months of the
shah. They have jailed hundreds yet have freed Mr Hajipour on bail.
Meanwhile, his song fills the campuses, streets and airwaves. And after four
decades of mandatory veiling, women are still defiantly walking bareheaded
past the police.■
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is-being-rocked-by-a-song
The Americas

Bolsonarismo battles on
Isolated but not independent
Voices of the powerless
Bolsonarismo battles on

Brazil’s presidential election will go to a run-off

Jair Bolsonaro did better than expected. Lula is still the favourite, but
narrowly
Oct 3rd 2022 | São Paulo

FOR LUIZ INÁCIO LULA DA SILVA, Brazil’s leftist former president, it

was a disappointing result. His supporters had dared to hope that Lula, as he
is known, might win an outright majority in a presidential election on
October 2nd. Instead the race was far tighter than most opinion polls had
predicted. Lula attracted 48% of the vote, while Jair Bolsonaro, the hard-
right populist incumbent, won 43%. The pair will face each other in a run-
off on October 30th.

The polarised campaign turned largely on which candidate Brazilians

disliked least. Many blame Mr Bolsonaro for mishandling the pandemic, for
his crude attacks on opponents and for a generally lacklustre economic
record during his term. Many others blame Lula and his Workers’ Party (PT)
for a previous economic slump, from 2014 to 2016, and for a massive
corruption scandal known as Lava Jato (Car Wash). Lula spent 18 months in
jail for receiving bribes, though his convictions were later overturned. At
one point, 38% of Brazilians said they didn’t want either Mr Bolsonaro or
Lula as president. But no other candidate mustered much support.

Mr Bolsonaro will go into the run-off feeling he has momentum. Many of

his closest allies were elected to Congress. Contrary to what polls predicted,
he got more votes than Lula in São Paulo, the most populous state. He
clearly benefited from a hidden vote: in-person polls may have oversampled
poor people, who tend to support Lula, and undersampled Bolsonaro fans,
who may have declined to participate because they mistrust pollsters.

An improving economy may have helped the president, too. Inflation, which
peaked at 12%, is now 8.7%. The government spent billions this year on
cash transfers and subsidies to poorer Brazilians, though more of them still
voted for Lula. In a speech on election night, Mr Bolsonaro attributed their
“desire for change” to high food prices and said he would convince them
that “certain changes are for the worse.” The day after the vote, the
government announced that October’s cash transfers would be doled out a
week early, well ahead of the run-off.

Mr Bolsonaro will also seek to benefit from new alliances in the states, such
as Minas Gerais, the second-most-populous state and a major battleground.
Some 48% of its voters picked Lula, compared with 44% who chose Mr
Bolsonaro. But the right-wing governor, Romeu Zema, won re-election with
56% of the vote. His post-election declaration of support for Mr Bolsonaro
may prompt some mineiros to switch their allegiance.

Lula remains the favourite to win the run-off, however. He beat Mr

Bolsonaro by around 6m votes. Many poorer voters retain fond memories of
his time in office, between 2003 and 2010, when his government channelled
the fruits of a commodity boom into social programmes. On the morning of
the election in São Bernardo do Campo, an industrial city near São Paulo
where Lula got his start as a union leader, Lourdes Nunes, a janitor, said that
a victory for the former president would allow her “to dream again”. Her
parents joined the middle class working in the Volkswagen plant when Lula
ran the metalworkers’ union. Her wages rose under Lula, too.

In a speech to his glum campaign staff after the election, Lula tried to lift
spirits. “Some of you are disappointed that I have 30 more days of
campaigning,” he said. “But I love campaigning.” His best hope for
attracting the 15m voters who annulled their vote or plumped for one of the
other candidates is to demonstrate his willingness to govern as a moderate.
On October 5th he secured an endorsement from Simone Tebet, a centrist
who won 4.2% of the vote. He may offer her a position in his government.
He also received a lukewarm endorsement from Ciro Gomes, the fourth-
placed candidate, who got 3%.

The run-off will test Brazil’s institutions, especially if Lula ends up winning
by a narrow margin and Mr Bolsonaro refuses to accept the result. For more
than a year the president has been sowing doubt about Brazil’s electronic
voting system, insinuating that anything other than his own victory is a sign
of “fraud”. On September 28th his Liberal Party released a document,
misleadingly called an “audit”, that falsely claimed that voting machines
were at risk of being hacked by “a few technicians [with] absolute power to
manipulate results of the election without leaving a trace”. Rather than
accepting that his strong result showed such criticisms to be misplaced,
some of his fans are claiming that he really won.

In São Bernardo do Campo on voting day Cleiton Moseli was so certain that
Mr Bolsonaro would win in the first round that he made a bet with a Lula
supporter: three cases of beer. “Lula has no chance,” he said. He felt that,
should Lula win, it would be proof of “manipulation” and he would protest.
His friend, José Tadeu, said he would ask for the army to intervene to
prevent Lula from taking office. Both echoed the president’s insinuations
that Lula would “close churches” and “implement communism” if elected.
Pablo Ortellado of the University of São Paulo, who monitors pro-Bolsonaro
groups, thinks that if Lula wins there could be “tumult”.

Mr Bolsonaro will continue to paint Lula as a corrupt, immoral communist,

says Cláudio Couto of the Fundação Getulio Vargas, a university. This
rhetoric will intensify a campaign that has been polarised and at times
violent. “Everything is tense,” says Esther Solano of the Federal University
of São Paulo. “All that is needed is a spark.” Three Lula supporters and one
of Mr Bolsonaro’s have been killed by each other’s fans.

In a recent poll commissioned by the Brazilian Forum on Public Security,

nearly 70% of Brazilians said they feared being physically attacked because
of their political opinions. The day before the election, a group of young
people at Lula’s final campaign march in São Paulo confessed that, for the
first time, they planned not to wear PT stickers when voting. “What if
there’s a bolsonarista? What if he has a gun?” wondered Giovana Moraes, a
23-year-old.

But voting on October 2nd went smoothly, with no reports of election-

related violence or any serious problems involving voting machines (around
3,000 malfunctioned and had to be replaced, 0.6% of the total, which is
normal in an election of this size). Many Brazilians will pray that the same is
true on October 30th.

In the meantime, it is already clear that the success of right-wing parties in

Congress will have long-term implications. Mr Bolsonaro’s party increased
its seats and will be the largest party in both the senate and the lower house,
where a bloc of conservative parties aligned with the president is just short
of a majority. “We’re not talking about a Congress that’s more clientelistic,”
says Guilherme Casarões, also of Fundação Getulio Vargas. “We’re talking
about a Congress that is more bolsonarista.”

If Lula wins, he will struggle to govern. Passing constitutional reforms,

which require a two-third majority, will be particularly difficult. Lula will
need the backing of opportunistic, centre-right parties who will demand pork
in exchange. Negotiations will happen on a case-by-case basis “and will not
be cheap”, says Bruno Carazza of Fundação Dom Cabral, a business school.
If Mr Bolsonaro wins re-election, he will have a far easier time pushing
through laws to loosen environmental regulations and gun restrictions. He
may attempt to increase the number of justices on the Supreme Court.
Regardless of who wins , bolsonarismo looks like a force that is in Brazil to
stay.■
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will-go-to-a-run-off
Isolated but not independent

Quebec elects François Legault’s fiercely

nationalist party
But Montreal remains immune to his pro-Quebec, anti-immigrant rhetoric
Oct 6th 2022 | Montreal

IS QUEBEC IN or out? With a few brief interludes, the question has

dominated the politics of the French-speaking province of Canada for more
than half a century. Separatist governments were repeatedly elected, only for
the population to shy away from independence when asked to vote in a
referendum. With the crushing re-election of François Legault as its premier
on October 3rd, the answer seems clear. Quebeckers want a fiercely
nationalist provincial government within a united Canada.

Mr Legault’s Coalition Avenir Québec (CAQ) tightened its hold on the

Quebec legislature, winning 90 of its 125 seats, up from 74 when the party
first won power in 2018. The two parties which have dominated the
province’s politics since the 1970s were battered. The federalist Liberal
Party received just 14.4% of the vote, the lowest in its 155-year history. But
because its votes were concentrated in relatively few ridings (electoral
districts) it remained the official opposition with 21 seats. Meanwhile, the
separatist Parti Québécois won slightly more votes (14.6%) but only three
seats.

Mr Legault, an accountant who made millions founding a budget airline,

was a Parti Québécois cabinet minister before losing faith in the separatist
cause. He founded the CAQ in 2011. The party appeals to Quebeckers’
comfort zone by not requiring them to make a difficult decision, says Jean-
François Lisée, a Parti Québécois political strategist who recruited Mr
Legault. “It says to them, ‘You don’t have to love Canada but you don’t have
to leave it either.’”

Mr Legault grew up in one of Montreal’s anglophone enclaves, yet winning

support in the city has not been a priority for him. His government adopted
legislation limiting access to services and education in English and other
non-French languages, while reducing the number of immigrants allowed
into the province. During the latest campaign, he derided Montrealers for
“looking down” on people from elsewhere in Quebec.

So while it consolidated support elsewhere, the CAQ remains shut out of the
metropolis, where it holds just two of 26 seats. “He’s talking basically to Joe
Pickup,” says David Heurtel, a former Liberal cabinet minister. “Montreal is
isolated; it truly is an island.”■
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fiercely-nationalist-party
Voices of the powerless

Cubans rage against the dying of the light

Blackouts caused by Hurricane Ian add to the misery of socialist
dictatorship
Oct 6th 2022 | Havana

ON SEPTEMBER 27TH Hurricane Ian took out Cuba’s electricity grid. The
blackout meant that the island’s food, which is scarce anyhow, rotted in the
heat. But the cover of darkness also provided the opportunity for Cubans to
protest. In several neighbourhoods of Havana, the capital, people banged
pots and pans and called for light and libertad, or freedom.

Even before the hurricane swept in, Cubans had a lot to protest about. The
island is undergoing the worst economic crisis since the 1990s, after the fall
of the Soviet Union. The current problems started with Venezuela’s
economic collapse in 2014, which reduced the amount of cash and cheap oil
it sent to the island. Donald Trump’s tightening of the American embargo
limited how much money Cuban Americans could send to their relatives,
and how often. Covid-19 shut off the island further from tourist dollars, and
few have returned. “The economy is in a very deep hole,” says Ricardo
Torres, an economist at the American University in Washington.
The government has not helped matters. At the start of 2021 it unified the
currency. This involved devaluing the Cuban peso from parity with the
dollar to its black market rate of 24 pesos to one greenback. One unfortunate
consequence is that last year inflation soared to 152%, according to the
Economist Intelligence Unit, our sister organisation. The exchange rate on
the street is 200 to the dollar and rising.

Salaries for state workers have increased five-fold. But that barely buys a
meal. Marín, a primary school teacher, earns 4,200 pesos a month. At the
official exchange rate, that is $175. In reality it is $21. He drives a taxi to
earn more. Similarly, from their kitchen in an outhouse, Sandra and Yoanka
Borges describe bartering with neighbours for milk, sugar and eggs to make
the Cuban sweets for their business, “Dulces Doña Manuela”. Over the past
year the cost of sugar has increased ten-fold.

Quietly and over the past decade, the government has lifted some of its
draconian restrictions on private enterprise. Last year private businesses with
up to 100 staff became legal and foreigners were allowed to invest in them.
Previously only freelancers, or cuentapropistas, were allowed to run a small
private business. Cubans can now import goods to sell rather just than for
their own use. The list of items that may be brought into the country by
plane has expanded to include cheese and condensed milk.

Cubans have seized these opportunities. More than 5,000 small businesses
were founded in the year after legalisation. Today private enterprises
outnumber state ones. But they are far smaller, and a thicket of regulations
keeps them that way. The economy remains dominated by big, unproductive
state firms that have privileged access to credit and dollars. All this keeps
Cuba far poorer than it should be.

That leaves the government in a quandary. “They don’t want to open enough
that the private sector has real power,” says Marta Deus, the founder of a
food-delivery business. But the state cannot cope. Its traditional sources of
income are hard to revive, reckons Mr Torres. Exports of tobacco, sugar and
fish are down. (The hurricane blasted the tobacco crop.) The government has
no money to buy seeds, fertiliser or animal feed. And because it has a
monopoly on importing and distributing these things, no one else can buy
them, either. In May President Joe Biden lifted caps on remittances to Cuba
put in place by Mr Trump. But Cubans abroad are loth to send money home,
at least via official channels, as these are run by the army and fleece their
customers by swapping their dollars for pesos at the derisory official rate.

Meanwhile, the power cut caused by the hurricane is not a one-off. The
government has failed to overhaul its ageing electricity grid. Cuba currently
relies on five Turkish power generators on ships floating off the coast. The
island’s total supply is only two-thirds of the 3,000 megawatts of demand.
Blackouts often hit Havana as well as the countryside. When the power goes
out, residents exclaim Vamos solidario! (let’s go in solidarity!), a dig at the
government’s explanation that the cuts in the capital are to show empathy for
rural folks.

The Communist Party’s economic model is not the only thing that seems out
of date. Few Cubans believe in socialism, the official ideology. Raúl Castro,
Fidel’s brother, who took over in 2008, has been less charismatic but more
reform-minded than his brother. Miguel Díaz-Canel, the current president
and first secretary of the Communist Party, lacks both the Castro name and
charisma. Even if he wanted to reform, he faces huge barriers from the party
and the civil service, says Carlos Alzugaray, a Cuban former diplomat.

Vamos!
In July 2021 thousands of Cubans took to the streets to protest about
shortages, lockdowns and one-party rule. Hundreds were arrested; many
were sentenced to 30 years in jail. Small protests continue across the island,
including in rural areas.

Others are voting with their oars. In August residents of El Cepem, a coastal
village, protested when police tried to stop them from emigrating on
makeshift rafts. Since October 2021 almost 195,000 Cubans have been
caught trying to cross the border between Mexico and the United States,
around four times the number in the previous two years combined, and far
more than in other exoduses in 1980 and 1994. Marín, the teacher, will soon
head to Spain. “There is no future here,” he says. ■
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the-light
Europe

Willkommen
What’s the plan?
Shadows of the past
Flashing das Cash
Willkommen

There are not enough Germans to do the jobs

Germany needs
The government is mulling making it easier to hire immigrants
Oct 6th 2022 | BERLIN

PERHAPS FRIEDERICH MERZ thought he was being clever. The head of

Germany’s main opposition party recently claimed on television that many
of the 1m Ukrainians who flooded into Germany this year came not as
refugees but as what he called “social tourists”, to take advantage of
government benefits. He should have known better. Even his own Christian
Democrats (CDU) said their leader had overstepped the mark. He was forced
to apologise.

But this was not just a slip of political judgment. Whether Mr Merz likes it
or not, Germany needs immigrants. It needs them urgently. Even as Russia’s
energy squeeze pushes Europe’s largest economy towards recession, an
acute labour shortage looms. A pair of surveys in the second quarter of this
year illustrate the trend. The Institute for Employment Research, a
government agency, estimated job vacancies in Germany at a record 1.93m,
66% more than last year. Meanwhile IFO, a think-tank in Munich, found that
49.7% of German companies cannot secure enough skilled workers, up from
30% in 2019 and the highest level since the surveys started in 2009.

The surge will not be short-lived, says Herbert Brücker of Humboldt

University in Berlin. Without changes to participation rates, retirement
dates, or immigration, Germany’s workforce is set to shrink by 15m-16m by
2060. “We have never had such a situation since the early 1970s,” says Mr
Brücker, noting that raising the retirement age or bringing more women into
the workforce would do little to reverse the problem. “Assuming we want
instead to keep employment stable, and to keep the dependency ratio down,
the only answer is more immigration.”

The current left-of-centre coalition recognises the challenge. It has floated

the idea of creating a Canadian-style points system to assess immigrants,
easing rules on professional qualifications, and letting skilled immigrants
hunt for jobs in Germany rather than insist they seal job contracts first. But
none of these changes has yet been made. Nor is it clear that tinkering with
rules designed largely to keep non-Europeans out and to prevent a replay of
the wave of Syrian refugees in 2015 that raised fears of Überfremdung
(getting overwhelmed by foreigners) can produce the volume of newcomers
actually needed.
Germany is not the only rich country to have more people retiring than
entering the workforce. Due to severe shifts in population dynamics after the
second world war, however, it faces a particular challenge. Depressed birth
rates in the 1950s were followed by a rapid spike to 1.4m births a year in
1964, and then by a steep fall to half that by 1975, explains Wido Geis-
Thöne, an economist at the Institut der Deutschen Wirtschaft in Cologne.
The swollen baby-boomer generation is now retiring, just as the children of
the “skinny” 1970s generation, who were born in the 1990s, are seeking
their first jobs.

A study in 2020 showed that for every 100 Germans in the about-to-retire
age bracket of 60-64, there was a corresponding cohort of just 82 in the
about-to-start-careers range of 20-24. More alarmingly, for every 100 aged
55-59 there were only 59 aged 15-19, and for every 100 Germans aged 50-
54 there were just 56 future workers aged 10-14. For comparison, the
averages across the EU were 83, 74 and 72 per 100.

At its natural rate of decline Germany’s workforce would shed some

350,000-400,000 people a year, a falling trend that Dr Brücker expects to
last a decade before slowing. The national statistics agency agrees,
predicting that without immigration Germany’s population could tumble
nearly 25% over the next 40 years, from 85m to 65m. This would strain not
only productive capacity, but the country’s ability to support the elderly.

Can imported labour fill the gap? Marcus Winter is sure it can. Of the 750
staff in the local outsourcing and services firm he runs in the prosperous
southern state of Baden-Württemberg, three-quarters are already foreign-
born. This includes not just unskilled labour but top managers, a trend
increasingly common across the country. Research by Dr Geis-Thöne shows
that while 51% of all cleaners and 35% of restaurant staff are foreign-born,
so are a quarter of medical and science faculty in German universities. Some
58% of Indian-origin wage-earners hold jobs requiring specialist skills or
university degrees, double the rate among native Germans.

Mr Winter would be happy to hire more immigrants. But workers from the
poorer fringes of the European Union, who can enter Germany visa-free, are
increasingly needed at home. Skilled would-be immigrants from countries
such as Brazil or Bangladesh still face hurdles despite immigration reforms,
introduced in 2000, that were meant to make Germany a talent magnet like
Canada or Australia. Low-skilled workers, whom Germany also needs, have
few legal ways of coming at all. “The laws are too hard,” says Mr Winter.
“They can only come to Germany if they have a comparable qualification,
but our system is very special and we don’t accept foreign degrees.”

The bar is set too high for both companies and workers, agrees Julia Beise-
Gehrmann, who runs a programme to help integrate foreign workers in the
relatively poor state of Mecklenburg-West Pomerania, in former East
Germany. On the plus side, she says, attitudes to foreign workers have
relaxed. Local companies that were sceptical of hiring outsiders now see that
they have no other choice. Their new concern is to keep them happy.

Vu Thanh Van, whose family settled in Mecklenburg-West Pomerania’s

seaport of Rostock in 2008, agrees that things are better now. Thirty years
ago, soon after Germany’s unification, a mob of locals surrounded and then
torched a building housing foreign workers and their families. Most were
Vietnamese who had been brought to East Germany as “guest workers” and
then stayed on. Now, says Ms Vu, the worst foreigners face in Rostock is
impoliteness, such as when second-generation immigrants are asked how
they speak such good German. ■
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jobs-germany-needs
What’s the plan?

Can Italy’s Giorgia Meloni afford the things she

wants?
The probable next prime minister has not yet explained her sums
Oct 6th 2022 | ROME

GIORGIA MELONI and her conservative allies won Italy’s election on

September 25th with an economic programme not unlike the one unveiled
two days earlier by Britain’s new chancellor of the exchequer, Kwasi
Kwarteng. Its central aim was to boost the economy with large tax cuts.
Employees’ welfare contributions would be cut. An unpopular regional
corporation tax would be scrapped. And a flat-tax regime for the self-
employed would be extended so that those with gross earnings of up to
€100,000 would pay as little as 15%. The right also pledged earlier
retirement for some and an increase in minimum pensions and child benefits.
How was all this munificence to be paid for? Since the programme would
boost growth, wages, profits—and thus the tax take—there was no need to
worry too much about fiscal sustainability, the plan promised.

Oxford Economics, a consultancy, calculates that the right’s stimulus could

add around 1.6 percentage points to GDP growth next year. But even
assuming that some of the measures were phased in gradually, the increase
in output would come at the cost of higher inflation and a budget deficit of
about 6.2% for the next five years.

The calamitous reaction to Mr Kwarteng’s mini-budget showed that

investors do worry. And with Italy owing more than half as much again as
Britain relative to its GDP, a similar response from the markets could have
grave consequences for the entire euro zone. So much, you might think, for
Plan A. But is there a Plan B?

Because of Italy’s unhurried provisions for changing governments, Ms

Meloni is not expected to become prime minister until late October. Her
immediate concern will be to tackle a multi-faceted crisis that would daunt
even the most experienced government leader: a toxic brew of energy and
cost-of-living crises against a background of war and the threat of recession.
The preliminary official estimate of annual inflation in September was 8.9%.
Some utility bills have tripled. In public squares across Italy people have
been burning their bills and joining lightning strikes and spontaneous
demonstrations to demand higher pay.

But Ms Meloni, coached by the outgoing prime minister, Mario Draghi, is

more reluctant than her ally, the Northern League leader, Matteo Salvini, to
increase Italy’s already vast public debt. She and her advisers are reportedly
planning to mitigate the effects of the cost-of-living crisis with a package of
measures worth 1.25% of GDP. That would be modest compared with recent
efforts by Germany and Britain, but the aim would be to fund it entirely with
the extra revenue that has flowed into the treasury largely because of
inflation.

So far, so prudently pragmatic. But there are already signs that Ms Meloni
will face resistance if she simply tries to ditch the right’s original plans. On
October 4th Mr Salvini and a senior member of the third main group on the
right, Silvio Berlusconi’s Forza Italia party, both argued for persisting with
the flat tax extension.

Much will depend on the composition of Ms Meloni’s cabinet. A team long

on technocrats would reassure markets and Italy’s EU partners. But her allies
want seats at the table. The more they have, the greater will be the pressure
on Italy’s next prime minister to stick to Plan A. ■
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things-she-wants
Shadows of the past

The war in Ukraine has awakened memories in the

Balkans
There are parallels and contrasts
Oct 6th 2022 | VUKOVAR

OUTSIDERS TODAY have mostly forgotten the Balkan wars of the 1990s.
As communism collapsed in Europe, the despotic glue that held together
Yugoslavia, a multi-ethnic state, dissolved. The country fell apart.
Unscrupulous political entrepreneurs won or cemented power by stirring up
ethnic paranoia. Battles were fought over which group controlled which
land. Atrocities multiplied. By the time the fighting was over in Slovenia,
Croatia, Bosnia-Herzegovina and Kosovo, some 4m people had fled their
homes and 140,000 were dead. To former Yugoslavs, says Ivan Krastev, a
political scientist, the world’s amnesia “is kind of an insult”.

One man who has by no means forgotten is Vladimir Putin. For him NATO’s
use of air power, despite Russian objections, to stop ethnic cleansing by Serb
forces in Kosovo in 1999, marked the nadir of Russia’s post-Soviet
weakness and humiliation. And Mr Putin’s continued support for Serbia is
one reason why today, two hours’ drive from Vukovar, the main pedestrian
boulevard of Belgrade, Serbia’s capital, sports mugs and T-shirts of Mr
Putin, along with “Z” baseball caps to show support for his invasion of
Ukraine this year.

The war in Ukraine has sent tremors across the Balkans. It has horrified
most, but thrilled Serbian nationalists who believe that a Russian victory will
somehow allow them to reverse the setbacks of the 1990s, including the loss
of Kosovo.

In Prekaz, a village in Kosovo, there is a ruined house, preserved as a

memorial, where the Serbian police killed the extended family of one of the
founders of the guerrilla Kosovo Liberation Army in 1998. At a café
alongside it Gresa Sefaj, a Kosovo Albanian, recalls February 24th, the day
on which the Russian invasion of Ukraine began. She was with friends, all
of them staring at their phones with tears streaming down their faces. “It all
came flooding back to us,” she said. “We knew exactly what would happen.”

During the Kosovo war Ms Sefaj and her family fled from then-Serbian-
controlled Kosovo. When they returned, it was to find that their house had
been torched by Serbian policemen, apparently in revenge for the family’s
involvement in the Kosovo independence movement. “The war will be a
disaster,” Ms Sefaj said. “They will lose family members, they will be
traumatised and they will never forget.”

Recalling Vukovar
Take another example. In March the Croatian press was filled with grim
comparisons. Mariupol, the Ukrainian port city that the Russians were
blasting to cinders in their bid to capture it, was, it was said, the “new
Vukovar”—a port on the Danube whose name is etched deep on every Croat
heart. In 1991, as Serbian forces closed in on Vukovar, they levelled it.
Today it is remembered by Croats as the martyred city of their four-year
“Homeland War”. What is left of Mariupol may one day play the same role
for Ukrainians.

Vukovar fell in November 1991. Just as Mr Putin now talks of liberating

Russians in Ukraine, Slobodan Milosevic, Serbia’s leader, talked of
liberating Serbs in Croatia, then 12% of the population. A large proportion
lived, mixed and intermarried with Croats. Like many in Ukraine before
2014, when Mr Putin first started grabbing Ukrainian territory, many in
former Yugoslavia had never even thought of what ethnicity they were until
war forced them to decide.

When Serbian militiamen seized Vukovar in 1991 a third of the population

identified as Serb. From then until 1996 it was under the control of a
breakaway statelet in Croatia, just as Mariupol is under the control of the
breakaway Donetsk People’s Republic in Ukraine, now illegally annexed to
Russia. By the end of 1991 a third of Croatia was controlled by the Republic
of Serbian Krajina. In 1995 Croatia, by then properly armed and with
American backing, snuffed out the statelet. The Serbs then agreed to the
peaceful reintegration back into Croatia of the last remaining chunk of it,
which included Vukovar.

Vast sums have been poured into Vukovar’s reconstruction since then.
Monuments dot the city and surrounding countryside. When the city fell,
Serbian soldiers dragged patients from the hospital and murdered some 200
of them. Now the underground wartime hospital is a shrine and museum
packed with coach-loads of Croatian children learning about what Croats
call the years of Serbian aggression. Ghostly mannequins lie in or try to
struggle out of their beds.

Whoever controls Mariupol in the future though, and whatever the

similarities, Vukovar risks being a sad role model. In 1991 it was home to
nearly 47,000 people. Now, calculates Drago Hedl, a local journalist, there
may be barely 18,000. This region has never recovered from the war.
Vukovar’s streets are neat, tidy and empty.

Crimes and punishments

The events of the 1990s still play out in Balkan politics, imagination and
fears. Forgetting is not an option. On June 8th a court in Belgrade confirmed
a war-crimes indictment against four Croatian officers for allegedly ordering
an air attack on Serb civilians during their flight from Croatia in 1995. A
special court set up in The Hague to try former Kosovo Albanian guerrillas
began trials just last December.
Today, war-crimes investigators are fanning out across Ukraine, and the
International Criminal Court has opened investigations there. In 1993 the
UN Security Council mandated the creation of the International Criminal
Tribunal for the Former Yugoslavia (ICTY). It indicted 161 people, of whom
91 were found guilty.

The core philosophy of the ICTY was that crimes would be attributed to
individuals rather than nations and that this in turn would lead to
reconciliation. There is not much evidence that this has worked. Most Serbs
are convinced that the tribunal was stacked against them and point to the
high-profile acquittals of several Bosnian Muslims, Croats and Kosovo
Albanians.

Mariupol follows Vukovar

Ukraine has already filed a case at the International Court of Justice (ICJ),
which tries countries rather than individuals, under the 1948 Genocide
Convention. Mr Putin says Russia is acting in Ukraine to halt a genocide
being committed by Ukrainians in Donbas. Ukraine says that Russia is the
one committing genocide in Ukraine. Mr Putin’s claim is nonsense;
Ukraine’s will be hard to prove. In the Balkans only the slaughter at
Srebrenica was ruled to be an act of genocide by the ICTY and the ICJ. In
2015 the ICJ threw out claims by Croatia and Serbia, both of which had
accused the other of committing genocide. The wheels of international
justice grind slowly; Ukrainians may be as disappointed with the results as
many in the Balkans are.

“It is 27 years since the end of the Bosnian war,” muses Miroslav Lajcak,
the EU’s top diplomat in the region. “Twenty-seven years since the end of
world war two was 1972 and where are the Balkans? They are still in the
past, mentally pointing fingers at each other.” The difference was that
“Germany never denied what it did and this helped Europe get over the past.
Germany absolutely accepted responsibility.”

In the Balkans virtually no one accepts responsibility for anything bad that
happened during the wars of the 1990s; or if they do it comes with a caveat.
Yes, Bosnian Serbs may have murdered 8,000 Bosniaks (Bosnian Muslims)
when Srebrenica fell in 1995 (“may” because many Serbs don’t believe this
is what happened, or dispute the numbers), but in any case they often retort:
“what about the 3,000 Serbs around Srebrenica who died during the war?”
In reality, there is a big difference. The vast majority of those were active-
duty soldiers, unlike the rounded-up Bosniaks who were murdered in cold
blood.
Dejan Jovic, a political scientist from Zagreb, says that politicians from all
sides in Bosnia are revisionists, in that they think the war ended badly for
them and their nation and would welcome the opportunity to change that.
They just can’t agree how. Milorad Dodik, the Bosnian Serb leader, has long
called for the dissolution of the Bosnian state. Everyone in the former
Yugoslavia has a different interpretation of what happened in the 1990s, and
that will not change soon. What is happening in Ukraine will similarly
poison relations between Ukrainians and Russians for generations.

A little good news

The lessons are not all gloomy. Since the end of the wars the countries of the
former Yugoslavia have at least been at peace. The war in Bosnia ended with
a deal, brokered by America in Dayton, Ohio. The Serbs gave up their
attempt to wrench as much of the country away from Bosnia as possible and
unite it with Serbia; Bosniaks accepted a decentralised state; and Bosnian
Croats gave up their separatist ambitions. Bosnia today is an unwieldy
construct, with leaders who agree on little. But inter-ethnic violence has not
returned.

Twenty-seven years after the end of the Bosnian and Croatian wars, and 23
years after the Kosovo war, progress has been made. Many of those who fled
their homes have returned. Properties lost were restored, even if those who
had fled from them chose not to go back. Some of the billions given or lent
by donors and international financial organisations was filched, but much
has been put to good use. New motorways criss-cross the region and signs
indicating that the EU has funded this or that project are ubiquitous.

On paper the Balkan countries remain poor, and compared with western
Europe they are; but their grey and black economies are huge. They are far
better-off than the numbers imply. Garden centres, which have mushroomed
across the region, are evidence that locals have enough spare cash to plant
flowers for fun. Construction is booming, fuelled in part by diasporas and
money-laundering. Tourism is a huge earner and not just on the seaside in
Croatia and Montenegro. Cars, arms and farm products are among Serbia’s
main exports and IT is growing fast. Ukraine’s far bigger economy, as it
happens, is not dissimilar.
In June Ukraine was conditionally accepted as a candidate to join the EU.
But the Balkans show how long the process can be. Slovenia and Croatia,
the richest ex-Yugoslav countries, joined the club in 2004 and 2013,
respectively. Others are stuck on the outside. Serbia and Montenegro have
been negotiating to join for years. North Macedonia gained candidate status
way back in 2005. Kosovo and Bosnia have not yet even been accepted as
candidates.

The post-war Balkans have seen successes, Mr Krastev says, but if the West
promises Ukraine that “we are going to do for you what we did for the
Balkans”, the response may be less than ecstatic. When it comes to EU
enlargement he says: “what are we promising Ukraine? To stay in the
waiting room for the next 30 years?”

Won’t you stay?

Whatever happens on the battlefield, Ukraine shares a big, long-term
problem with the Balkans. Even before the exodus of some 7m refugees
Ukraine, like most Balkan states, had a rapidly shrinking population. In 2019
its fertility rate was 1.23 babies per woman, per lifetime. Bosnia’s was 1.25.
These are among the lowest numbers in the world. The EU’s was 1.5 in
2020. A country needs 2.1 births per woman to maintain a stable population,
unless it has a hefty inflow of immigrants. Neither Ukraine nor the Balkan
countries attract many of those.

The longer the war goes on, the fewer Ukrainian refugees are likely ever to
return. Ukraine is poorer than any Balkan country, and even before the war it
was losing brain and brawn to the EU.

Alida Vracic, a think-tanker who grew up in Sarajevo during the war, says it
alarms her to hear how confident her Ukrainian friends sound about their
country’s prospects. “They should brace themselves for lots of
disappointments…People who are not on the front lines will become rich,”
and Ukraine, like Bosnia, will be bled dry by war profiteers and new
political elites who will come to power thanks to the conflict, she says,
adding hyperbolically: “These disappointments will hurt them more than the
actual war.” ■
Read more of our recent coverage of the Ukraine crisis.
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memories-in-the-balkans
Charlemagne

A German aid package revives calls for solidarity

with poorer EU countries
The single market is looking wobbly
Oct 6th 2022

IMAGINE QUEUING up at a food bank only for a millionaire to rock up in

a BMW and announce he is snapping up the entire supply of grub. That is
roughly how Europe feels these days. Amid a continent-wide energy crunch,
governments from Athens to Warsaw have spent months figuring out how to
keep homes warm and factories running. European politicians have shared
their best ideas, and tried to make sure whatever they did at home would not
beggar their neighbours too much. The sense of everyone being in the mire
together at least reinforced the unity forged in response to Russia’s invasion
of Ukraine. Until, that is, Germany on September 29th flashed its cash with
a surprise €200bn ($197bn) energy package to secure its own economic
prospects. So long, suckers!

Governments across Europe have helped businesses and households deal

with soaring power prices. Utility bills have been capped, taxes trimmed,
benefits boosted. Most would love to do more, but there is only so much
they can afford, especially after years of spending freely to keep the
economy afloat during covid-19. Germany last week in effect proclaimed
that such limits don’t apply to it. Because of healthy state finances, it can
afford to borrow up to 5% of GDP to create a “protective shield” that will
insulate Germans from the cost of higher energy. While everyone else in
Europe will have to cut back on gas or suffer the consequences, those in
Europe’s biggest economy will be able to behave as if not much is going on.
In case anyone felt their nose insufficiently rubbed in German success,
Christian Lindner, the finance minister, proclaimed: “We are economically
strong, and we mobilise that economic strength when it is needed.”

A splurge that big is a problem not just because it prompts envy among the
neighbours. The real problem is that a lot of the German largesse will go to
businesses; precisely how much will only be known once the plan is fleshed
out in the coming weeks. The result will be a large distortion to Europe’s
single market. How can a Spanish steelmaker, whose heavily indebted
government cannot afford to shield it from high gas prices, compete with a
German rival whose energy bills are being subsidised? Wait long enough
and Europe’s only thriving companies will be those based in countries
whose governments can afford to back them.

In normal times, the EU’s answer is to forbid state handouts to businesses.

(Spanish football clubs have been berated by Brussels for receiving undue
tax breaks: it would be unfair for taxpaying German clubs to try to compete.)
State-aid rules were suspended during covid-19, as national governments
bailed out everything from airlines to pizzerias. The problem of excessive
generosity in Germany and other places that could afford it soon emerged.
Variable domestic capacity to help was incompatible with Europe being a
“level playing field” for business, the goal of decades of political effort. The
way to square the circle was to spread some of Germany’s financial power to
the rest of the EU. Thus, as the pandemic raged, a novel form of European
solidarity was agreed in the form of a €750bn bail-out fund, Next Generation
EU (NGEU). The money is a form of redistribution: it is borrowed by the
EU, but will in effect be paid back by its richest members while being doled
out to its poorest. This gave fiscal capacity for southern Europeans to
stimulate their own economies in the recovery.
Is another NGEU the answer to the German splurge? Some are laying the
groundwork for it. Mario Draghi, who will soon depart as Italian prime
minister but will remain the continent’s economic wonk-in-chief, warned of
“unjustified distortions” to the single market. Bruno Le Maire, France’s
finance minister, on October 3rd argued that Europe’s response to the
pandemic should serve as a blueprint for thinking about the energy crisis.
European commissioners from France and Italy argued for some element of
the game plan of 2020 to be revived as part of a “Europe of solidarity”.

An NGEU 2.0 is hardly a new idea: issuing common debt at EU level is the
euro-federalists’ answer to every problem these days. For that reason alone it
is unlikely to happen. “Frugal” countries, led by the Netherlands and to
some extent Germany, only signed up to the original NGEU on the condition
it be a one-off. Even claims that war on the continent and the ensuing energy
mayhem are as unprecedented as covid will not abate penny-pinchers’ fears
that redistribution would become a standard part of dealing with any future
EU recession. If countries want to spend their own ways out of recession,
Germany in effect says, they are free to run up surpluses in good times.
(Easy to do when you scrimp on defence for decades and guzzle cheap
Russian gas, comes the response.)

Deutsche mark my words

The plan’s bark may be worse than its bite. Having bigged up the €200bn
figure for a domestic audience, Olaf Scholz, the German chancellor, tried to
play it down for foreign consumption. The aim is still to cut energy use, the
money will be spent over two years, and some might never leave state
coffers. That would put German largesse on par with others, he argued.
France’s price cap, say, gives no incentive for households to lower their
thermostat settings—though it does little for big businesses, thus limiting the
harm to the internal market. In contrast Germany aims to “protect [its]
economic fabric”, at a time when that of others risks being torn to shreds.
Worse, the rest of Europe had no idea it was coming. Many had hoped Mr
Scholz would agree to an EU-wide price cap on imported gas (as will be
discussed at a meeting of EU leaders on October 7th). Instead, he has served
up a domestic one.
A new NGEU is unlikely while the existing scheme still has lots of money to
dole out. A compromise might be to revive another covid-era EU scheme,
which allowed countries with high interest rates to borrow cheaply by
having their loans guaranteed by those with better finances. That would go
some way towards reassuring Europeans that, although Germany is putting
its own interests first, it has not entirely forgotten it is part of a union. ■

Read more from Charlemagne, our columnist on European politics:

Europe’s plans for laxer spending rules shows German influence is waning
(Sep 29th)
To prevent diplomatic shakedowns, Europe must curb abusive national
vetoes (Sep 22nd)
Demonising nationalist parties has not stemmed their rise in Europe (Sep
15th)
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solidarity-with-poorer-eu-countries
Britain

Fourth time unlucky

In a fix
Watched dog
Latin lovers
A tale of two cities
Accidental austerity
Fourth time unlucky

A chaotic conference fractures Liz Truss’s young

premiership
Twelve years in power catch up with the Conservatives
Oct 5th 2022 | Birmingham

LIZ TRUSS pitched herself as the heir to Boris Johnson. She was loyal to
him and to the manifesto on which he had won a vast victory in 2019. She
shared his optimism about Britain. The only difference was that she would
do things better, bringing delivery and discipline where he had offered
scandal and drift: Johnsonism without Johnson. Party members liked what
they saw, and made her party leader and thus prime minister.

In office she has done the opposite. She has repudiated the central planks of
Mr Johnson’s government: a difficult but electorally successful fusion of
fiscal discipline and state intervention. But she has adopted many of the
most damaging traits of Mr Johnson’s way of governing. The result has been
a swift return to the bitter internal warfare that has dogged the Tories for
much of the past decade. The party’s support in the polls has cratered; so, in
spectacular fashion at the party’s conference in Birmingham on October
2nd-5th, did the Conservatives’ capacity to govern.
Mid-term reinvention has sustained the Conservative Party—switching
leader and creed while holding power, changing the government before the
electorate could force change at the ballot box. That process has found its
limits in Ms Truss, the party’s fourth leader in 12 years, whose government
has immediately imploded.

On September 23rd Kwasi Kwarteng, the chancellor, unveiled the largest

package of tax cuts in 50 years, including abolishing the top rate of tax of
45p in the pound for earnings over £150,000 ($170,000). Coupled with Mr
Kwarteng’s decision to fire Sir Tom Scholar, the top civil servant at the
Treasury, and the refusal to commission forecasts from the Office for Budget
Responsibility, a watchdog, the market response was a sharp sell-off of
government bonds. The Bank of England will now increase rates even more
sharply than it would otherwise have done.

As a result, Ms Truss has immediately surrendered two huge tracts of

electoral real estate. Voters felt able to indulge Mr Johnson’s appetite for
redistribution and state intervention because he was publicly constrained by
Rishi Sunak, his chancellor and a fiscal disciplinarian. Due to her expansive
budget and her advocacy of tax cuts for the rich, Ms Truss has sundered the
party’s reputation for both economic competence and fairness. “This
government has rejected everything that Boris won the last election on,”
Rachel Wolf, the co-author of the manifesto of 2019, told a conference
panel. Labour has filled the void with its own agenda of public ownership
and balanced budgets.
That has initiated a collapse in Tory poll ratings (see chart 1). Polls
conducted in the past week show an average lead for Labour of 23.7%. Ms
Truss’s net approval rating of -59 is worse than Mr Johnson at his lowest,
said YouGov, a pollster, on October 5th. The loss of the Tories’ historic edge
on handling the economy means it is hard to see a scenario in which Labour
do not form the next government, says James Johnson, a former Downing
Street pollster. Many MPs think a wipeout beckons.

The central task of Ms Truss’s government now is regaining the confidence

of Britain’s creditors by filling the large fiscal hole left by the budget. The
hard choices that requires, coupled with the collapse in the party’s poll
ratings, unleashed insurrection at the conference in Birmingham. On
October 2nd Ms Truss yielded to MPs who warned they would not support
her budget, and abandoned the 45p tax cut. “They have lost control of the
politics, and the authority has gone,” said one rebel. She has a small window
to win back her party when Parliament reconvenes on October 11th. One
malcontent gives her only a one-in-five chance of success; more likely, they
say, she will be forced from office by the end of the year.

This is a crisis of Ms Truss’s making yet it has strong echoes of the past 12
years. It owes much to Mr Johnson’s style: heroic optimism about the speed
with which the government can direct economic activity and outright
dismissal of sceptics as naysayers. (In her conference speech on October 5th
she took aim at an “anti-growth coalition” whose members include a
nameless elite who “taxi from North London town houses to the BBC
studio”.) In truth, the plans for low-regulation “investment zones” are barely
more sketched out than Mr Johnson’s “levelling up” programme. “She
thinks she can just assert things, and make them true,” says one critic.

If that is a familiar story, her costly blunder in sidelining the OBR and the
Treasury also followed an approach taken by Mr Johnson towards
institutions that check executive caprice. Moody’s, a credit-rating agency,
had warned back in 2020 that the erratic Brexit negotiations under his watch
were part of a pattern of institutions becoming weaker and policymaking
more unpredictable.

The collapse in cabinet government that began during the Brexit

negotiations under Theresa May also accelerated remarkably in
Birmingham. The old principle that cabinet deliberates in private and is
unified in public is dead. Ms Truss’s options for filling the fiscal hole left by
her budget are constrained after a pair of cabinet ministers declared that
welfare budgets must keep pace with inflation.

As for the party, the rebellion in Birmingham was so fast and effective
because the struggles of the Brexit years and Mr Johnson’s recent downfall
have given its plotters plenty of practice. The 45p rebels marshalled their
numbers via phone-calls and spreadsheets far faster than the government
whips could.

In a happy party, grandees are a stabilising force; in an unhappy one, they

are ringleaders. The uprising was led not by a young radical but by Michael
Gove, a veteran of three cabinets and numerous other feuds. Suella
Braverman, the home secretary, accused his gang of a “coup”. That carries
little weight given how she trades on her time as one of the hardliners who
paralysed Mrs May’s government.

Ms Truss appears to have learnt nothing from her predecessors’ downfalls;

she made little effort to win round an unruly party. Her position was already
weak: although the members’ choice, she won the support of fewer MPs
during the leadership contest than Mr Sunak. But she made little effort to
include his supporters in the cabinet. Many MPs feel she has no mandate for
a new direction.

Her prospects of succeeding where Mr Johnson failed, and convincing MPs

to vote for sweeping reforms to planning law on which her “growth plan”
partly rests, look slim. Loyalist cabinet ministers argue that the collapse in
Conservative polling strengthens an all-or-nothing case to push ahead; for
MPs fearful of losing their seats because of a backlash against new
developments, there is much less incentive to back Ms Truss on such
measures. With the government’s polling on the floor, the House of Lords
will feel no compulsion to approve measures that were not outlined in Mr
Johnson’s manifesto, says one rebel.

All this means that relations with businesses, which were strained under Mrs
May and Mr Johnson, show little sign of improving. Although Ms Truss
declared her love for enterprise in her main conference-hall speech, the
annual business reception on the sidelines of the event was a tense affair. Mr
Kwarteng gave a perfunctory address; one boss told ministers that the
growth plan amounted to nought. A declaration by Andrew Griffith, the
finance minister, that the government wanted to see more “risk-taking” in
business was met with dark humour. “In one day, this party has destroyed its
reputation in the City,” said one attendee of the mini-budget.
Mr Johnson’s victory of 2019 instilled a hubristic belief in the party that a
new leader gave the Tories an opportunity to present themselves as a wholly
new government, and that voters would not notice or care about infighting
and decay. But they did. For all the electoral success, the sentiments that
underpinned voting intention were being slowly eroded.

The proportion of voters thinking the Conservative party was “fit to govern”
steadily declined from a high of 56% in September 2015, after Mr
Cameron’s second victory, to a low of 21% just before Mr Johnson left
office (see chart 2). Those who thought the government did a “good job” of
economic management fell similarly over the same period, from 56% to
27%. That long-standing malaise now appears to have fed through, swiftly
and dramatically, to the Conservatives’ national polling. ■
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trusss-young-premiership
In a fix

Britain’s mortgage market is adjusting to higher

interest rates
But it will be a painful process for existing and wannabe homeowners
Oct 6th 2022

“A LITTLE TURBULENCE” is how Kwasi Kwarteng, the chancellor of the

exchequer, later described the effects of the now-notorious “mini-budget”
which he delivered on September 23rd. In the housing market Mr Kwarteng
has unleashed a bonanza of bumpiness.

According to Moneyfacts, a data firm, between September 23rd and October

4th over 40% of mortgage products disappeared from the market as lenders
avoided getting on the wrong side of spiking interest rates. Demand has
surged for those products that remained available. Paul Timmins of Quick
Mortgages, a broker, says that most customers used to get in touch perhaps a
month before their fixed-rate mortgage was due to expire. Now he is hearing
from panicking customers as much as a year before.
Interest rates were on the rise long before Mr Kwarteng’s fiscal statement.
On January 31st the average rate on new mortgages was 1.59%; by August
31st that had risen to 2.56%. But recent increases have been much faster.
Between September 1st and October 3rd expectations for where the Bank of
England’s base rate, which influences mortgage rates, will be in two years
rose by 1.5 percentage points. Andrew Wishart of Capital Economics, a
consultancy, expects average new mortgage rates of 6% in the first quarter
of next year (see chart). That would be the fastest annual jump since 1989.

The risk is that this jump in rates will set off a nasty downward spiral. Some
people may be unable to keep repaying their mortgages, prompting a rise in
repossessions. Mr Wishart predicts arrears to rise from 0.7% of mortgages
now to 1.6% in 2024. Rather than falling behind on dearer mortgage
payments, other households will pull back on spending elsewhere.
Prospective buyers will find themselves unable to afford what they could
before. That, combined with a darkening macroeconomic backdrop, will
push down house prices, making homeowners feel poorer and further
crimping their spending.

Some reassurance comes from the fact that lending standards have been
relatively stringent, at least compared with those before the global financial
crisis of 2007-08. For example, stress-testing to see if borrowers can
withstand a big change in their mortgage rate has been much more common.
Because house prices have risen by over 25% since June 2020, it would take
a large correction to propel lots of borrowers into negative equity. Those
unfortunate enough to be struggling with their interest payments should get a
sympathetic reception from their banks, who do not want the bad press of
evicting people.

Even so, higher interest rates will hurt. Mr Wishart expects average
mortgage costs to grow from 2% of total household income to over 5% by
mid-2024. That shock will be concentrated on the third of British households
that have an outstanding mortgage on a home they own. Neal Hudson of
Residential Analysts, a consultancy, reckons that currently around 300,000
mortgages each quarter are coming to the end of their fixed-rate period,
rising to 375,000 in the second quarter of next year. Yet even for those who
do not have to remortgage immediately, spending now will be dampened in
anticipation of much higher bills in future.

House prices already seem to be turning. Mr Timmins has noticed a sharp

drop-off in enquiries from new customers over the past month as
affordability constraints bite. Although Nationwide’s house-price index
showed that prices in September were 9.5% higher than a year earlier,
monthly growth has stalled. Gabriella Dickens of Pantheon
Macroeconomics, a consultancy, calls it “the start of a prolonged fall”. In
May 2021 Jon Cunliffe, deputy governor of the Bank of England, cited
evidence showing that a one-percentage-point increase in the bank’s policy
rate would lower house prices by 6-9%.

If prices plummet uniformly then those in the toughest bind will be those
who bought recently (meaning they have not had the benefit of rises in
house prices), as well as homeowners in London, where recent price
increases have been relatively modest and where the ratio between loans and
incomes tends to be highest. Mr Hudson estimates that a 20% fall in house
prices would leave nearly 10% of mortgages in London larger than the value
of the underlying property.

From the perspective of monetary policymakers at the Bank of England,

whose next meeting is due in early November, higher interest rates are
meant to cause pain. They are worried about high inflation becoming
embedded in the economy, a concern that the government’s fiscal splurge
will only have exacerbated. But they usually prefer to pull policy levers
slowly and thoughtfully. The next increase is likely to be a wrench. ■
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to-higher-interest-rates
Office for Budget Responsibility

Britain’s fiscal watchdog is caught up in a political

storm
All eyes are on the Office for Budget Responsibility
Oct 6th 2022

WHEN KWASI KWARTENG unveiled the biggest package of tax cuts in

half a century on September 23rd, something was missing. Ordinarily the
Office for Budget Responsibility (OBR), a fiscal watchdog, accompanies
budget announcements with a forecast of the health of the public finances.
But its services were rejected by the chancellor, and without the OBR’s
conclusions to look at, investors drew their own. Now Mr Kwarteng is
scrabbling to make amends. The OBR’s forecasts, along with its assessment
of whether the government is meeting new medium-term fiscal
commitments, may now be published before the end of the month.

The OBR was set up by George Osborne, a former chancellor, in 2010 to

provide detailed economic forecasts, an assessment of whether the
government is on track to meet its fiscal targets, and scrutiny of the
government’s costings of individual tax and spending measures. He said
then that it would leave the government “nowhere to hide the debts, no way
to fiddle the figures, and no way of avoiding the difficult choices that have
been put off for too long”.

Now that Mr Kwarteng has decided to embrace such scrutiny, the OBR’s
pointy heads will be busy over the coming weeks. One task will be to
scrutinise the Treasury’s estimated cost of the planned tax cuts and analyse
their indirect effects on the growth of the economy. Another will be to look
at the impact of new (yet-to-be-announced) supply-side reforms. The
government argues that these will enhance growth, making the fiscal outlook
rosier. The OBR will be sceptical. Although the watchdog does give credit to
policies backed by solid evidence, where that is lacking it tends to wait and
see what effects they have.

Mr Osborne chose not to make the OBR as strong as it could be. It can
neither offer opinions on the merits of government policy, nor ignore
policies that the government would struggle to implement, such as deep
unspecified cuts to public services. It does not decide the rules against which
to assess the government’s fiscal performance, a loophole that Mr Kwarteng
may exploit by, for example, delaying the time by which he has to meet his
goal of a falling debt-to-GDP ratio. But the OBR’s independence is now
central to the credibility of the government’s fiscal plan. The new chancellor
has inadvertently strengthened the institution he tried to sidestep. ■
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in-a-political-storm
Latin lovers

A £4m scheme to bring Latin into British state

schools begins
A subject seen as being for “posh white boys” tries to extend its reach
Oct 6th 2022 | Pimlico

EVELYN WAUGH, a novelist, valued his classical education. Not because it

enabled him to understand ancient languages: Waugh could remember no
Greek, write no Latin and enjoyed reading neither. But it did enable him to
excel in a more important exercise: spotting and judging those who knew
less than he. Such people (“most Americans and most women”) betrayed
their deprivation with sentences of “inexcusable vulgarity”. “I do not,” he
wrote, “regret my superficial classical studies.”

Latin occupies an odd place in English curriculums. One part proper subject,
two parts smug social shibboleth, to have chanted “amo, amas, amat” in a
Latin class has long implied membership of another kind of class altogether.
The decline and almost fall of Latin in state schools in the 20th century did
not diminish its social cachet, because numbers in fee-paying independent
schools remained high. In 2020 eight times more pupils sat Latin GCSE at
Eton, a posh school, than in the entirety of Northumberland. Waugh
considered Latin the mark of a gentleman. Mary Beard, a professor of
classics at Cambridge University, puts it more briskly: it gets seen as a
subject for “posh white boys”.

This harms it—a bit—and helps it—a lot. Posh white boys tend to do quite
well for themselves. A famous example recently left Downing Street; as he
left, Boris Johnson mumbled that he was like Cincinnatus, a reference to a
retiring Roman that both alarmed classicists (Cincinnatus returned as a
dictator) and appealed to them (they got the joke).

Classicists may lament the passing of the subject’s golden age, but it
declined for good reasons. A Britain alternately warmed by the white heat of
technology and chilled by fear of the cold war had to prioritise science over
dead languages. In 1960 Oxford and Cambridge dropped Latin O-Level as
an entry requirement. Good thing too, says Professor Beard: not to have
changed would have been “bloody stupid”.

Changes continue to be made. Cambridge University has just introduced a

four-year classics degree for those who have studied no Latin at school. And
while he was in office Mr Johnson tried to make the subject more accessible
via the Latin Excellence Programme, a £4m ($4.6m) scheme to bring it to 40
state schools.

Which is why, on a rainy Monday in September, in Pimlico Academy in

London, children sit in a lesson that would have felt familiar to Waugh. The
verb “esse” is chanted; etymologies are discussed; the word “conjugate” is
used fearlessly. Its pupils would have felt less familiar to him, however:
almost half of pupils in the school are on free school meals; 15% have
English as an additional language; many are even female.

Employers and universities still like to see Latin, explains Ian Patterson, the
academic head at Pimlico: there is a “prestige attached to it”. The pupils like
it too: shouting “sum, es, est”, they think, is fun. But Latin is about more
than verbs: it makes them feel clever too, says one pupil, as “not lots of
people learn it.” Waugh could hardly have put it better himself. ■
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british-state-schools-begins
Urban governance

British cities have far too little power, and it’s

holding them back
A comparison of Bristol and Gothenburg
Oct 6th 2022 | BRISTOL AND GOTHENBURG

DAN NORRIS has a nice job. Last year he was elected mayor of the West of
England, an area of almost 1,000 square kilometres centred on Bristol. His
personal mandate of 125,000 votes is larger than any MP’s, giving him a
high local media profile and a lot of clout. He gets to dispense goodies,
including a pot of £540m ($610m) for public transport that Britain’s central
government awarded to the West of England in April. Mr Norris says that
people are nicer to him than they were when he was an MP.

His patch is a comfortable one, too. Britain has ten metropolitan mayoralties,
all but one created since 2017. Successive Conservative regimes have seen
elected “metro mayors” as problem-solvers who can stimulate growth; the
current levelling-up secretary, Simon Clarke, has called himself a “huge
believer”. Many of the mayors oversee places that are poorer than average,
but Mr Norris does not. Output per person in his area’s hotspot, Bristol, is
19% higher than the national average.
All seems well, then—until you compare Mr Norris’s domain to a similar
area in another European country. Set Bristol next to Gothenburg in Sweden
and its weaknesses become clear. So does the real cause of its problems.
Bristol, and by extension all British metropolises, do not have the means or
the incentives to transform their fortunes. Until they do, a government
hungry for growth is likely to be disappointed.

The two cities each have about half a million inhabitants, and are part of
functional urban areas—as defined by the OECD, a club of mostly rich
countries—that are twice as populous (see chart). They have about the same
GDP per person. Both are coastal cities, situated west of their countries’
capitals. They are cosmopolitan, open-minded and occasionally riotous. But
the two cities, and the metropolises around them, are governed and funded
completely differently. And that makes all the difference in the world.

The northern part of Gothenburg’s city centre resembles a giant construction

site. That is due to the West Link, an underground extension to the existing
railway which will make it far easier and quicker to reach the city centre
from the suburbs. Nearby, cars and trams stream into and out of central
Gothenburg over the newly built 440-metre-long Hisingen bridge. Some of
the vehicles are heading for Lindholmen, an emerging business district
where Scandinavia’s tallest building is rising.
Gothenburg has many other infrastructure plans. A new tram line will be
built under the Gota river. The existing tram network of 12 lines is being
expanded and modernised. A recently approved urban plan, which has been
advertised on billboards around the city (“Vi har en plan!”), envisages a
transformed public transport system with more circular routes. Per
Wingqvist, the head of mobility, says the city is already thinking about
another major railway, which might be built around the year 2070.

Bristol has good railway connections to the rest of England and Wales. But it
has neither a municipal tram network nor an underground railway. In 2004
the government in Westminster offered money for a tram line, which might
have been the first of many. But local politicians could not agree a route, and
the opportunity was lost. They still do not agree. Mr Norris wants to look
again at trams. Marvin Rees, mayor of the city of Bristol (a soon-to-be-
abolished office), argues that only an underground railway could carry
enough people. A railway line will probably be built between the city and
Portishead, to the west. But that will only take Bristol back to where it was:
a Victorian railway along the route was closed to passengers in 1964.

Buses were deregulated and privatised by central-government fiat in the

1980s, as in most British cities. That stripped local politicians of powers—
Mr Norris complains that he does not even control the bus stops—and left
Bristol and its neighbours with a confusing variety of transport options.
Ticket pricing is complicated and changeable. The main railway station is a
20-minute walk from the main bus station. By contrast, Gothenburg’s
transport app sells tickets that can be used interchangeably on trams, buses,
trains and ferries, and tells you when everything is due to arrive. The
Swedish city’s transport network is easier to negotiate than Bristol’s even for
a monoglot English-speaker.

The gulf between the two cities is even larger when it comes to planning and
housing. Both acknowledge that they struggle to build enough homes, but
Gothenburg manages to put up more than 4,000 a year, over twice as many
as Bristol. Just beyond the city boundary, in Molndal, AstraZeneca is
building so many offices, laboratories and homes that the number of people
employed on the pharmaceutical firm’s campus is expected to rise from
2,800 to about 10,000. The company’s boss in Sweden, Katarina Ageborg,
says local officials were “flexible and easy to work with”. Besides, the area
is not spectacularly beautiful, she says, waving at a landscape of suburbs and
pine forests.

Building on the outskirts of Bristol is extremely hard, no matter what the

landscape looks like. Local politicians zealously police the huge 717-square-
kilometre green belt, a no-build zone around the city and its near neighbour,
Bath. Mr Norris has tried to persuade them to agree on a plan that would
prioritise certain places for new housing and offices, to no avail. Talks
collapsed earlier this year amid much anger.

Both urban areas are adding people, but Gothenburg has the edge. Its
population is growing faster than Bristol’s, and 0.3 percentage points a year
faster than Sweden’s as a whole, on average. Gothenburg’s GDP has grown
more quickly than Bristol’s too—a remarkable feat given the failure a
decade ago of Saab Automobile, a carmaker that employed many local
inhabitants.

Britons have long admired Scandinavian countries, especially Sweden.

“Sweden deserves her reputation. In so many ways she is ahead of the rest of
us,” argued Paul Britten Austin, who wrote several books on the subject
from the 1950s. A common theme is that Swedes are careful and consensual,
not given to rancour or violent swings in policy.

That picture is not at all true of Gothenburg, where political disputes are
often vicious. A congestion charge that was introduced to pay for the West
Link is deeply unpopular. Axel Josefson, the head of the municipal council
(the closest office that Gothenburg has to a mayor), argues that the city is
severely under-policed and that the government in Stockholm distributes too
little money for major infrastructure projects. “Our feeling is that we pay
more than we get,” he says.

Still, Mr Josefson answers a question about whether Gothenburg has the

powers and resources to solve its own problems straightforwardly: “In
general, yes.” The city levies an income tax of 21%, while the region of
which it is part tacks on another 11% (the national income tax, paid only by
high earners, is 20%). As well as planning and transport, the city and region
handle education, welfare and health care. Overall, 37% of tax in Sweden is
raised locally. Swedish cities and regions have become mightier, grabbing
powers from central government and accounting for a growing share of the
tax take.

Gothenburg and its neighbours smile on development not because they are
cool and rational but out of self-interest: more people means more taxpayers.
They build roads and tram lines to keep the economy humming. Although
the national government chips in for the biggest infrastructure projects, cities
have plenty of skin in the game. Almost half of the financing for the West
Link railway comes from Gothenburg and other local governments, mostly
from the congestion charge. “As a city we have a lot of say,” says Mr
Wingqvist. “But it comes at a high price.”

In Britain just 6% of taxes are raised locally. Local authorities levy taxes
linked to the value of property and keep some business rates, but these do
not fund all their operations—and they are in charge of much less than
Swedish local authorities. They have less incentive to allow home-building.
In 2011 the central government tried to prod them with a “new homes
bonus” but this has become stingier over time. Cities and metropolitan areas
rely on the national Treasury to pay for almost everything—even things like
transport, over which they supposedly have control.

The system of bidding for Treasury cash has made British cities into
perpetual supplicants. “Governments announce pots of money and then ask
local authorities to fight for them,” says Mr Rees. As a result, local
politicians and officials spend their time competing for what money is
available rather than thinking about what their cities really need. And some
of the pots are comically small. Onward, a think-tank, pointed out earlier
this year that the national government had invited local authorities to bid for
cash to build public toilets for disabled people. Bristol was awarded
£123,814 for three toilets.

The central issue

Mr Rees thinks that the problem is a fundamental one. British prime
ministers come to power promising to unleash growth, and invariably
assume they can do it from the centre: “They think that there’s a bunch of
levers around Whitehall that they can pull and get outcomes.” Cities and
metropolises, which understand the local restraints on growth, are then
invited to help deliver the government’s vision. Nobody is particularly
interested in what they think, or what they might be able to do if they could
manage their own affairs. ■
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power-and-its-holding-them-back
Bagehot

Liz Truss turns to accidental austerity

How the government embraced death-cult Osbornomics
Oct 6th 2022

LONG DEAD she may be, but the Iron Lady lives on at the Conservative
Party’s conference. Margaret Thatcher and other former Conservative
leaders are deified at the annual jamboree, which took place this year in
Birmingham. Fringe events are held at the Thatcher theatre. Men born in the
early 2000s dress like 1980s throwbacks in pinstripe suits and tribute braces.
A psychedelic picture of Benjamin Disraeli leers out from a tote bag,
alongside the faces of Boris Johnson and St Maggie herself. Attendees can
even buy a Winston Churchill baby bib.

Strangely, the face of George Osborne, who was chancellor of the exchequer
under David Cameron from 2010 to 2016, appears on no tea towels or tote
bags. Yet it is his policies that Liz Truss’s new government has started aping.
The announcement on September 23rd of unfunded cuts to corporation tax,
income tax, stamp duty and national insurance has left behind a hole in the
budget of £43bn ($49bn; 1.5% of GDP). Unless Ms Truss reverses course,
filling it could well require spending cuts to rank alongside Mr Osborne’s
efforts to slash the state. Dreams of a 1980s-style supply-side revolution
appear already to be in tatters. “Ms Truss wanted to be Thatcher,” says Dan
Tomlinson, an economist at the Resolution Foundation, a think-tank. “She’s
ending up imitating Osborne.”

This would not, however, be a straight copy of the Osborne years. The
Conservatives are heading for an Osborne-style revolution without the
support of MPs, voters or markets and against a far less benign economic
backdrop. In short, it is a death-cult version of the Osborne era.

Start with the politics. In 2010 the Conservatives were a well-disciplined

party, hungry for power after 13 years out of office, willing to do unpopular
things. In 2022 blood-soaked former cabinet ministers stalk from one event
to another with the soft smiles of serial killers. Even current members of
cabinet sound off about potential spending cuts they don’t like. Penny
Mordaunt, a former (for now) leadership rival of Ms Truss, has publicly
demanded that the government increase in-work welfare payments in line
with inflation, at a cost of about £11bn in the first year. Craig Oliver, the
government’s chief spinner during the Osborne years, coined the nifty term
“prebellion” in response.

Mr Osborne left space to surprise voters on the upside. The former

chancellor pushed through stealth tax cuts, raising personal allowances so
that people took home more money even when the headline rates stayed the
same. By comparison, his successor as chancellor, Kwasi Kwarteng, talks
noisily about tax cuts that will leave people no better off. By 2026, for each
£1 ($1.12) in tax cuts, a household will lose £2 via freezes on various tax
thresholds, according to the Institute for Fiscal Studies, a think-tank. Couple
this with rising energy bills and mortgage costs, and people may not feel
richer even if the government’s plan to boost growth works and the economy
is flying.

The British government is used to marking its own homework when it

comes to its finances. Chancellors were broadly left to set (and tweak) their
own fiscal rules on spending while the market nodded along. Mr Kwarteng
no longer enjoys the benefit of the doubt, after picking fights with the
Treasury, criticising the Bank of England and ignoring the Office for Budget
Responsibility, a watchdog. Government-bond markets are not supposed to
be startled when a chancellor speaks, in the same way that the chancellor’s
red box is not supposed to spring open and his packed lunch fall out. And
yet the “fiscal event” on September 23rd sent gilt yields rocketing and
sterling plunging. Investors will now decide whether Mr Kwarteng’s fiscal
rules are credible. Markets will ponder whether structural reforms are able to
muster a parliamentary majority, like a Club Med economy during the euro-
zone crisis.

Previous radical programmes by Conservative governments have benefited

from a rosier economic backdrop. Thatcher benefited as revenues from
North Sea oil and gas poured into the Treasury’s coffers. Mr Osborne was
helped by inflation and interest rates both bobbing along near to historic
lows globally. Now the Conservatives face an energy crisis, rocketing
inflation and interest rates lurching upwards, too.

After 12 years of Conservative rule, moreover, there is no scapegoat. During

the 2010s Mr Osborne shifted the blame onto Labour at any opportunity.
Once Teflon, the Conservatives are now flypaper: whatever is thrown at
them sticks. During one interview with the BBC this week the chancellor
was asked about the “Kwarteng premium” on people’s mortgages. Mr
Kwarteng huffed that interest rates had shot up globally, thanks to central-
bank decisions in America. It was to no avail. Call-ins are stuffed with
furious homeowners facing large bills.

Curious George
Voters put up with austerity, rather than supporting it. The Conservatives
failed to win a majority in 2010, instead governing with the Liberal
Democrats, and then barely scraped to a small majority in 2015. Only Boris
Johnson’s vision of big-state Conservatism proved truly popular with voters
in the 2019 general election, handing the party an 80-seat majority, its
biggest since Thatcher. Those who voted for it are in for a shock, much as
Lib Dem voters were flummoxed by the austerity measures implemented in
their name during their time as Mr Osborne’s coalition partners. In 2010 the
Lib Dems had 7m votes; in 2015 they won 2.5m.

A return to a near-suicidal version of the Osborne years explains why

pessimism permeated every corner of the Birmingham conference. Under
Ms Truss the party is doomed, runs the consensus view of several former
ministers. And yet the mood among the merchandise stalls was almost
giddy. One attendee, a man of the cloth no less, summed it up best: “It’s like
a wake, but no one’s sure if the corpse is the Conservative Party or just Liz
Truss’s ministry. And like every good wake, everyone’s getting smashed.” ■

Read more from Bagehot, our columnist on British politics:

Keir Starmer: the rise of Default Man (Sep 29th)
King Charles versus Trussonomics (Sep 22nd)
The monarchy’s secret weapon: insincerity (Sep 15th)
This article was downloaded by calibre from https://www.economist.com/britain/2022/10/06/liz-truss-turns-to-accidental-austerity
International

How pop culture went multipolar

Capitals of cool

How pop culture went multipolar

Fears that globalisation would lead to a worldwide monoculture have
proven utterly wrong
Oct 6th 2022 | Paris and Seoul

THRONGS DESCENDED on the Jamsil Arena in Seoul, the South Korean

capital, in July to see Super Junior, a band that exemplifies the “Korean
Wave”. The crowd reflected the global reach of K-pop. Melonie was visiting
from Ecuador. When asked about her “bias”, the term fans use to discuss
which band member is their favourite, she pulled her top aside to reveal a
tattoo of the name of the group’s leader, Leeteuk, on her chest. Karen, from
Peru, is doing a master’s degree in South Korea. She thinks she likes Super
Junior even more than she likes Korea itself.

Once the show began it was clear why Super Junior appeals to people
around the world. The band’s rotating membership are dewy-faced heart-
throbs recruited from South Korea, China and America. With backgrounds
in acting and dance, they are consummate performers. Songs were
punctuated with banter and skits. The strutting and pouting was directed not
just at the screaming women in the stadium but also at cameras dotted
around the stage, streaming the performance to audiences in other time
zones.

Helped by government money and savvy marketing, South Korean popular

culture has taken the world by storm. Besides music are films such as
“Parasite”—which became the first film in decades to win both the Palme
d’Or and a Best Picture Oscar—dramas such as “Squid Game”, and a bevy
of fashion and beauty brands. But it is only part of a broader transformation.
Throughout the 20th century, cool was mostly a Western thing. From
flappers to hip-hop, people looked to cities like London, New York and Paris
for fashion, music and entertainment. After the cold war, as the world grew
richer and more connected, says Marty Kaplan, a professor at the University
of Southern California, many people feared that the West’s cultural
dominance would keep growing and ultimately produce a global
monoculture.

The opposite has happened, says Dr Kaplan. Today, a teenager sitting in

New York is as likely to listen to K-pop and Afrobeats tracks, a sort of west
African pop, as American hip-hop. A young Mumbaikar logging onto a
video-streaming platform for an evening’s entertainment is as likely to watch
“Made in Heaven”, an Indian-made romantic drama about two wedding
planners in New Delhi, as “Call My Agent”, a French comedy about a talent
agency in Paris. Pop culture has gone multipolar.

This can be seen even in deeply uncool things such as trade data. The World
Trade Organisation and the OECD, a club of mostly rich countries, produce
estimates of the trade in “audio-visual services”, which includes films, radio
and television. Their data suggest that, across the OECD, imports from
America were 25% of the total in 2020, down from almost 40% a decade
earlier. America’s cultural imports, meanwhile, have risen almost six-fold,
and are coming from all over the world.

Say goodbye to Hollywood

To look more closely at the music industry, The Economist examined data
from Spotify, the world’s largest music-streaming firm, covering 70
countries between 2017 and 2021. English-language songs, many of which
are produced by American and western European artists, still dominate. Of
the 50 most-streamed songs on Spotify over the past five years, 47 were in
English. But that dominance is slipping. In countries with a strong local
music industry, such as India, Indonesia and South Korea, the share of
English-language tracks in the top 100 has fallen from 52% to 31% over the
past five years (see chart 1). In Spain and Latin America the figure dropped
from 25% to 14%, as local artists, many of whom sing in Spanish, won
acclaim.

A similar diversity is evident in what people watch. FlixPatrol, a Czech firm,

tracks the most-watched programmes and films every week in almost 90
different countries on Netflix, a video-streaming service. By its estimates,
North American programmes still dominate in rich, English-speaking
countries like America, Australia and Britain, where they make up 80% to
85% of the most popular shows and films (see chart 2). But in Argentina,
Brazil and Colombia only around half of the most-watched shows were
North American. In Japan and South Korea the share was lower still, at less
than 35%.

Two things have driven the emergence of multipolar pop culture. The first is
economic growth in countries that until recently were poor. Rising incomes
give consumers more money to spend, much of which goes to local
musicians and film-makers. More money in turn means more artists. With
that virtuous spiral comes self-confidence. Scott McDonald, head of the
British Council, a government-backed body that promotes Britain abroad,
recalls his most recent trip to China, just before the pandemic. Rather than
questioning him about the latest trends in the West, as they had done on
previous visits, the people he met were keen to show off chic local shops,
restaurants and social-media stars. “Every single person was telling me: we
don’t care what’s happening around the rest of the world anymore because
we have the coolest stuff here,” Mr McDonald says.

The second factor is the rise of the internet, which has created many more
opportunities to put out content. On traditional television and radio channels,
executives carefully chose what would air in the limited number of time
slots available each day. Online-streaming firms are free from such
scheduling constraints, and can host far more content. TV and radio
transmissions are usually restricted to the country a channel is based in.
Netflix, Spotify and the like are global, which makes it easier for local
productions to earn fans overseas.

Most democratic of all are social-media platforms such as Instagram, TikTok

and YouTube, which let aspiring performers anywhere in the world create
songs or art that can be distributed at no cost. Recommendation systems that
sift through millions of accounts every day offer an automated alternative to
record-company talent scouts or TV commissioners.

The upshot is that there is far more entertainment and culture out there than
there used to be, and that borders matter much less than they used to. The
biggest account on TikTok, for instance, belongs to Khaby Lame, a
Senegalese-Italian. His light-hearted posts, which mock social-media trends
and generally have no words, have an international appeal that has won him
over 150m followers. It is hard to imagine Mr Lame, who was laid off from
a factory job in 2020, achieving that sort of success in the old-media world.
T-Series, an Indian record label and film company, has 226m subscribers on
YouTube, the most of any account. India’s hundreds of millions of internet
users propelled T-Series to fame. But these days a third of its audience is
based outside its home country. Burna Boy, a Nigerian singer, became the
first African to sell out Madison Square Garden in New York City this year.

The more consumers in one country are exposed to culture from other
countries, the more adventurous they get. Young people today, accustomed
to scrolling through posts produced across the globe on social media, are not
put off by subtitles, says Brian Graden, a former head of programming at
MTV, a music channel, who now runs his own production company. Nor do
they expect a uniform style across the videos they watch. Much of the
entertainment industry, he says, realised this only after “Squid Game”, a
Korean-language drama with a largely Korean cast, became one of the most
watched shows on Netflix last year.

The decentralisation of cool is forcing change on the arts and entertainment

industry, which is coming to recognise that many of today’s most influential
tastemakers come from the developing world. As Jeremy Zimmer, who runs
United Talent Agency (UTA), a Los Angeles-based group, puts it: “you have
to wake up every day and think about your business not as Los Angeles and
New York but as wherever culture is and wherever the audience is.” Earlier
this year, UTA, whose clients had traditionally been American actors based
in Hollywood, began representing Anitta, a singer, who has since become
the first Brazilian to win a prize at the MTV Video Music Awards.

The winds of change are even blowing through European luxury fashion,
one of the most hidebound corners of the cultural industry. Launchmetrics,
an analytics group, studied celebrities talking about Paris Fashion Week this
year and found half of the ten most valuable voices, in terms of the boost
they gave to advertising, came from emerging markets. They included a
Filipino actress, and a Brazilian football player. Only one French influencer
—and no Americans—made the list.

All that may explain why Balenciaga, a fashion firm founded in Spain in
1919 and which sells $2,000 handbags, decided to take its collection to
Shanghai in 2021, when covid-19 restrictions prevented Chinese influencers
from going to Paris Fashion Week. When Celine, another high-end fashion
brand, closed Paris Fashion Week this year, the crowds that formed outside
Palais de Tokyo were there as much for the K-pop stars on the guest-list as
for the French fashionistas.

It’s only rock and roll, but I like it

Killjoys might be tempted to dismiss pop culture as mere frippery. But as
Andrew Breitbart, a right-wing American journalist, once observed (in a
very different context), politics is downstream of culture. Pop culture can be
a vector of “soft power”—a country’s ability to shape the preferences of
others using attraction rather than coercion. Films and music can draw
people to visit a country, study there, learn the language and sympathise with
its ideals.

Super Junior’s rollicking performance at Jamsil Arena was about catchy

tunes, baby-faced heart-throbs and a screaming mass of young women. But
it was also about soft power. Midway through the spectacle, Donghae, the
lead vocalist, thanked the audience in English, Korean, Japanese and
Mandarin. All the while, his headset dangled nonchalantly over his shoulder,
the South Korean flag emblazoned conspicuously on the earpiece. ■
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Special report

Regime change
The ageing paradox
Feedback loop
Greenbacks for greenery
The total bill
Long road back
The end of 2%
The world economy

Inflation and rising demands on governments are

changing economic policy
It amounts to an upending of the previous regime, says Henry Curr
Oct 5th 2022

IN 2013 JULIO ROTEMBERG, an economist, proposed a theory of what

drove once-in-a-generation shifts at the Federal Reserve: penitence.
Something deplorable would happen in the economy, like the Depression in
the 1930s or the great inflation of the 1970s. The central bank would be
blamed. Then it would absorb the criticisms and change course. Monetary
policymakers were, in effect, engaged in a decades-long process of trial and
error.

A moment of penitence has struck again today—and not just in America.

Global inflation has surged to 9.8%, catching policymakers, economists and
investors by surprise. Central banks, having spent most of 2021 insisting that
inflation was a post-pandemic aberration that would dissipate in a few
months, have abruptly changed tack. Fully 33 of 38 central banks monitored
by the Bank for International Settlements, the central bankers’ central bank,
have raised interest rates in 2022. The Fed has tightened monetary policy
more sharply than at any time since the 1980s. Andrew Bailey, governor of
the Bank of England, has spoken of “the largest challenge to the monetary-
policy regime of inflation targeting” in its history. Like medieval medics
preparing for bloodletting, many central bankers talk sternly about the pain
that will be necessary to get inflation down.

It is not just central bankers. Governments are repenting too. But even as
monetary policy is on course to switch from stimulus to restraint,
governments have moved in the opposite direction. During 2020 and 2021
they spent 10% of GDP supporting their economies and provided another
6%-worth of loans. Whereas after the global financial crisis of 2007-09
many quickly turned to trying to balance budgets in the belief that their
debts risked becoming unsustainable, today they are continuing to borrow
and spend, on everything from tax cuts to subsidising energy bills.

This special report will argue that a great policy reversal is under way in the
rich world. The tight-fiscal, loose-monetary policy mix that defined much of
the 2010s is being upended into a loose-fiscal, tight-monetary policy one.
The likely result is a tug-of-war between hawkish central banks and
spendthrift governments that will make inflation harder to fight. It will lead
to a reckoning about just how much short-term pain societies are willing to
bear in the name of long-term economic stability. But it could, ultimately,
help economic policy into a beneficial reboot.

Back to the future

The last time the world fought an inflation breakout, in the 1980s, monetary
and fiscal policy worked in tandem to wring excessive spending out of the
system. Between 1978 and 1984 Britain, Germany and Japan all
dramatically cut their budget deficits; France and Canada did so at a gentler
pace. The big exception was America, where Ronald Reagan’s unfunded tax
cuts hit the economic accelerator even as Paul Volcker’s Fed was slamming
on the brakes. But although Volcker usually gets the credit for taming
inflation, it was not fully vanquished until monetary and fiscal policy
worked in tandem there as well. America’s taxes rose, and budget deficits
fell, in the second half of the 1980s, stopping inflation from rebounding as it
had done after the recessions of the 1970s. A number of economists argue
that the change in fiscal policy was crucial to bringing inflation under
control.

Yet similar fiscal retrenchment looks highly unlikely today. In Britain Liz
Truss, the new prime minister, has cast aside the fiscal austerity that her
Conservative predecessors espoused in the 2010s. Her government is
borrowing more to fund tax cuts, lambasting Britain’s economic
“orthodoxy” of the past two decades. The European Union is doling out its
€807bn ($782bn) “Next Generation” fund designed to underpin solidarity in
the bloc, a level of fiscal integration and largesse that was unimaginable
before the pandemic. The Japanese and South Korean governments are
rhetorically committed to reducing borrowing but their actions speak louder
than their words: Japan has stepped back from a target to balance its budget
by 2025, and South Korea says it plans soon to cut corporate and income
taxes.

America has passed the Inflation Reduction Act, a climate-change law that
will also reduce government borrowing. But the disinflationary effect is
marginal, and President Joe Biden’s proposed cancellation of student debt
will cost roughly twice as much as the act will save. On budget projections
from May, before that policy was announced, America’s budget deficit was
already projected to average nearly 5% of GDP over the rest of the decade,
enough to push the public-debt to GDP ratio to 105%.

Governments are spending freely to help households with soaring energy

bills, especially in Europe, which is adapting to life with much less Russian
gas. Protecting low-earners in 2022 would cost less than 1% of GDP,
according to the IMF. But governments are going much further. Germany
has nationalised Uniper, its biggest gas importer, and is spending €200
billion (5.2% of GDP) on an “economic defence shield” including subsidies
that will reduce gas prices. France is capping energy prices and has
nationalised EDF, an energy giant. Though windfall taxes on energy firms
will pay for some of Europe’s spending, deficits will rise, too. Britain could
borrow as much as 6.5% of GDP to cap energy prices. Germany is
circumventing its usual limits on debt accumulation.

A long list
The pressure on governments to spend will not abate much. Ageing
populations push up outlays on health care and pensions. Governments want
to decarbonise their economies, which will take significant public front-
loaded investment. After Russia’s war on Ukraine, NATO members are
reiterating previously unmet promises to meet their target of spending 2% of
GDP on defence. In isolation, many of these pressures may be manageable.
In combination, they will place budgets under huge pressure.

In theory, big-spending governments plus rising interest rates are a recipe for
persistently high inflation and/or a bond-market rout. Investors have given
Britain a stark reminder of this danger, reacting to Ms Truss’s largesse by
selling British assets, especially government bonds. Yet for countries with
more stable economic polices, long-term borrowing remains cheap by
historical standards, especially once the possibility of higher inflation is
taken into account. One consequence of ageing populations is a global glut
of savings chasing scarce investment opportunities. There remains plenty of
appetite for government debt.

It would be foolish to forgo necessary spending on preventing climate

change or securing peace in Europe when the world is awash with capital.
Yet both short-term and long-term challenges lie ahead. The immediate
difficulty is that big spending by governments will make it harder (and
perhaps impossible) for central banks to hit their 2% inflation targets.
Governments are unlikely to stand idly by as central bankers inflict pain on
their economies in the name of getting inflation down. They could instead
unleash fiscal stimulus before the disinflationary task is complete. The
danger is even greater when economies are already buffeted by supply-side
shocks, notably the energy crisis. Without fixing the underlying shortages, it
is not within the gift of governments to stop the economic pain they cause—
they can only redistribute to protect the poor. If politicians try to protect
everyone’s living standards, they will cause prices to rise further.

The long-term challenge is to avoid fiscal crises. Ageing societies are a

challenge spanning the whole of the 21st century. If governments do not
control their spending on the old, eventually they will run up against fiscal
limits, whatever their cost of borrowing. It would be a mistake to accumulate
debts simply in order to put off hard choices, using up fiscal space that may
be needed in future crises—not just climate change, but also unforeseen
disasters such as pandemics. Yet reining in pension and health-care spending
is easier said than done. ■
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governments-are-changing-economic-policy
The ageing paradox

Elderly populations mean more government

spending
They also mean low interest rates
Oct 5th 2022

AT THE PEAK of concerns over public debt and deficits in 2010, President
Barack Obama created a bipartisan commission charged with putting
American fiscal policy on a sound footing. Crucial to this was containing
growing spending on health care and pensions as America’s population
aged. By 2020 the resultant “Simpson-Bowles” plan aimed to bring
America’s debt-to-GDP ratio down to about 66%. Gloomy officials at the
Congressional Budget Office (CBO) wrote up an “alternative fiscal
scenario” that showed a “clear threat” of a fiscal crisis if corrective actions
were not taken. In it, the debt would rise to 95% of GDP in 2022.

The actual figure for this year will be about 98%. That nobody worries much
about it any more shows how far economists have rethought the limits on
government borrowing in an era of low interest rates. Over the past decade
they and many politicians have come to see the panic over debt and deficits
of the early 2010s as a mistake. The director of the CBO at the time later
admitted that rushing to reduce borrowing was “the biggest error” of the
economic cycle. Worrying about public debt is now deeply unfashionable.

But so, until not long ago, was worrying about inflation. Now that interest
rates are rising again, might the fiscal rethink also be reversed? Long-term
pressures on budgets from health-care and pension spending continue to
mount. The share of the world’s population that is over 50 years old has
grown from 15% to 25% since the 1950s, and it is projected to rise to 40%
by the end of the 21st century. The IMF reckons that by 2030 annual pension
and health-care spending in the G20 will have risen by an average of 2.8%
of GDP in advanced economies and 2.6% of GDP in emerging markets.

Britain’s budget watchdog forecasts that stabilising debts at 75% of GDP

would require cutting spending or raising taxes by 1.5 percentage points of
GDP at the start of every decade for 50 years, a fiscal consolidation that
seems almost unimaginable given that the tax burden is even now at its
highest since the early 1980s.

History shows that controlling pension spending in ageing societies is hard.

It means taking on “grey power” at the ballot box. In his book “Making
Social Spending Work”, Peter Lindert studies 36 countries and finds only
five that have contained pension spending as a share of GDP since 1990:
Chile, Latvia, New Zealand, the Netherlands and Peru. In no Mediterranean
country did public-pension benefits grow more slowly than output per
working-age person from 1990 to 2013. Many countries have raised the
retirement age as ageing has started to bite, but not by enough to stop the
length of time that workers live in retirement creeping up—an expensive
luxury.

In Japanese footsteps
Much of the West is thus likely to walk the path already trodden by Japan,
whose rapid ageing began in the 1990s. Its generosity to pensioners,
benchmarked to incomes, is comparable to that of America, says Mr Lindert.
Around 2011 Japan reached the dependency ratio of 2.5 people aged 20-64
for every person aged over 64 that is forecast in America for 2050. That year
Japan spent about 10% of GDP on the elderly, about a quarter more than
America spends today. Rising spending on the elderly has helped propel
Japan’s gross public debts to a vertiginous 266% of GDP.

Other Asian economies are also ageing rapidly, though their pension systems
are not as generous as Japan’s. By 2035 there will be 420m Chinese aged
over 65. The Chinese government has rolled out pension coverage with
remarkable speed over the past decade, yet the basic pension on offer outside
cities is beneath the poverty line. South Korea’s fertility rate (the number of
births per woman) is just 0.81, the lowest in the world; by 2075 it will have
three over-65s for every four people of working age. Its pension provision is
in the lamentable position of being both stingy and creating a black hole in
the budget. The logical path forward is to increase pension contributions—
which is almost as hard as cutting benefits.

Everywhere debt will continue to offer a tempting short-term fix. And

although ageing populations are a drag on government budgets, they also
limit how high interest rates are likely to rise. As workers approach
retirement they build up savings. Today those savings compete for a
dwindling set of profitable investment opportunities, because retirements
also slow economic growth. In recent decades the scramble for returns has
pushed down the so-called “natural” rate of interest, which equilibrates
saving and investment globally. The public has lapped up government debt
even at the low interest rates on offer.

Several studies have found that ageing populations and rising longevity have
contributed half to three-quarters of the roughly two-percentage-point fall in
the natural rate of interest since the 1980s. Even the slump in bond markets
in 2022 has not fundamentally altered the long-term picture. As this special
report was being completed, the governments of America, Germany and
Japan could still borrow at rates ranging from 0.25% to 3.7%.

Central banks can raise real interest rates temporarily to fight inflation. But
the only way real rates can stay persistently high is if the savings-investment
balance shifts. Some economists have suggested that this may indeed happen
as ageing proceeds. Don’t workers saving furiously on the cusp of retirement
become pensioners keen to splurge on cruises and cabernet?

In “The Great Demographic Reversal”, an influential book, Charles

Goodhart, a former official at the Bank of England, and Manoj Pradhan, a
forecaster, argue that the crucial factor for interest rates is the world’s ratio
of workers to pensioners. As this ratio falls in the 21st century, global
savings will dry up, the authors argue, contributing to a rise in inflation and
interest rates.

Yet most economic models reject this view. Elderly households tend to hoard
wealth in retirement, rather than running it down quickly. They may limit
their spending because they do not know how long they will live, or wish to
pass money on to their children. Increasing longevity encourages workers to
stash away money for a longer retirement. Using UN population projections
and today’s behaviour to project forward rates of saving and investment for
25 countries, Adrien Auclert, Hannes Malmberg, Frédéric Martenet and
Matthew Rognlie, four economists, predict that global rates will fall by
another 1.2 percentage points between 2015 and the end of the 21st century.
Three other economists, Noemie Lisack, Rana Sajedi and Gregory Thwaites,
believe there will be a half-a-percentage-point fall in rates by 2050.

The paradox of ageing is thus that it both pushes up government spending

and makes possible cheap financing of that spending. In fact, without
governments readily running up debts the downward pressure on interest
rates in recent decades might have been greater. The tripling in rich-world
public debts between 1971 and 2017—from about 20% of combined GDP to
about 70%—left rich-world interest rates 1.5-2 percentage points above
where they would otherwise have been, according to Larry Summers and
Lukasz Rachel, two economists. Had the natural rate of interest been
determined only by the behaviour of the private sector, it might have fallen
by fully seven percentage points, into deeply negative territory. That would
have created big problems for central banks, whose policy rates must follow
the natural rate downwards to avoid recessions, but which run into a hard
floor near zero.

Governments should be careful how they use the fiscal space that the saving
glut creates

Over time it is possible that some governments might spend forcefully

enough and persistently enough to overcome the impact of ageing. But
mobility of capital across borders means that what matters is the balance
between savings and investment at a global level. In 2005 Ben Bernanke,
then chairman of the Federal Reserve, hypothesised that a “global saving
glut” was holding down long-term interest rates in America. Mr Bernanke
was particularly struck by the accumulation of dollar reserves by
governments of Asian countries including China and South Korea. They and
oil exporters, which were accumulating vast sovereign-wealth funds,
appeared to be financing America’s growing current-account deficit.

Today, reserve accumulation has slowed and the saving glut is less visible in
current-accounts. But Mr Auclert and his co-authors predict that so-called
“global imbalances” are likely to return over time, as capital flows from
countries that are ageing faster to those ageing more slowly. Because
America’s transition is mild relative to the rest of the world’s, it will absorb
foreign capital, particularly from China, Japan and Germany. Around the
middle of the century, just as those countries cease ageing and start drawing
down their savings, India’s vast population will start ageing, meaning that it
will become the dominant global creditor.

How much would governments need to borrow to sop up the savings

tsunami? Mr Summers and Mr Rachel suggest a rule of thumb that a one-
percentage-point rise in the aggregate debt-to-GDP ratio for all advanced
economies raises the natural rate of interest by 3.5 hundredths of a
percentage point. The rule implies that the rise in debts during the pandemic,
about 12% of rich-world GDP, would have increased the natural rate of
interest by about 0.4 percentage points. Indebtedness would need to rise by
three times as much again just to offset the downward pressure on rates
forecast for the rest of the century, let alone to reverse the downward trend
of the past 30 years.

The low natural rate of interest will continue to allow many rich countries to
maintain high debts. But that does not mean it would be wise for them to go
on a Japanese-style borrowing binge. To begin with, the gross figures are
misleading: Japan’s net debt, which accounts for the government’s financial
assets, is only 172% of GDP. If every advanced economy borrowed to the
same extent, then the Summers/Rachel rule of thumb suggests that the
natural rate of interest would rise by about 3.3 percentage points, undoing
both the 20th-century decline in rates and the forecast 21st-century fall. A
more instructive comparison is with Italy, whose net debts are almost 140%
of GDP, enough for markets to worry at today’s interest rates (and even with
the European Central Bank prepared to buy government bonds).

Governments should, therefore, be careful how they use the fiscal space that
the saving glut creates—especially when unexpected crises like the
pandemic or the war in Ukraine can strike at any time. Borrowing
maximally to postpone pension reform or higher taxes is risky and wasteful.
And there is an even more pressing project for which the money may be
needed: reaching net-zero carbon emissions. Decarbonisation will also
weigh on budgets for decades. ■
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government-spending
Feedback loop

Is the world economy in a debt trap?

And, if so, how can countries escape it?
Oct 5th 2022

AN ALTERNATIVE EXPLANATION for why real interest rates have fallen

since the 1980s is that many countries have become less equal. Richer
people save more as a percentage of their income, so as they earn a bigger
slice of the economic pie, aggregate savings rise. Atif Mian, Ludwig Straub
and Amir Sufi, three economists, say that the American economy suffers
from a “savings glut of the rich”, two-thirds of which has been used to
finance the debt of the American government or borrowing of other
households.

They also propose that rising inequality can cause economies to fall into a
“debt trap”. The savings of the rich push down interest rates, encouraging
other sectors to borrow and spend more. Over time, the indebtedness of the
poor to the rich transfers income upwards, giving the rich even more
savings. The cycle starts again, and real interest rates fall further. Policies to
stimulate the economy in the short term, such as low interest rates or debt-
financed fiscal stimulus, lead to even more debt, meaning lower rates and
worse recessions in future.

Today central banks are raising rates to fight inflation. If Mr Mian, Mr

Straub and Mr Sufi are right, economies will be more sensitive to higher
rates than in the past. Rates will not need to rise much to squeeze indebted
households and governments, who will see big chunks of income diverted to
the rising costs of servicing mortgages and bonds. But over time the debt
trap will assert itself and real interest rates will stay low.

One weakness of the framework for analysing the world economy is that in
many rich countries household debt has not risen much as a percentage of
GDP since the crisis of 2007-09. Even as rates fell close to zero, households
repaired their balance-sheets rather than borrowing more. Governments are
running up debts, but their spending is subject to the whims of politics and
may not fall as interest rates rise, given the huge pressures on budgets.

There are economies in which households have been on a borrowing binge,

however. One is South Korea, where the household-debt-to-GDP ratio rose
from 79% in 2010 to 109% at last count. Approximately half of household
debt is linked to short-term interest rates, which are rising. In a report on the
economy in March, IMF staff estimated that the higher level of household
debt would be enough to lop an additional 10% off spending in South Korea
should rates return to around 5%, their level in 2000.

How might economies escape such a debt trap? Messrs Mian, Straub and
Sufi say that only a reduction in inequality can do the trick, whether via
redistribution or through structural reforms. But there is another force that
might have the same effect: inflation. Unexpected inflation redistributes
wealth from creditors to debtors, says Mr Straub, so long as it leads to strong
wage growth for debtors, and is not just the result of newly expensive
energy. Often economists see inflation as a veil—a “nominal” rather than a
”real” phenomenon. But, should central banks fail to tame price rises, they
will redistribute from creditors to debtors, and so might alter the
fundamentals of the world economy as well. ■
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trap
Greenbacks for greenery

The energy transition will be expensive

But not catastrophically so
Oct 5th 2022

IN 1965 BRITAIN struck gas in the North Sea. The government wanted to
exploit its new fuel to heat buildings. But the gas that had been found was
different from “town gas”, made from oil and coal, which most boilers were
designed to use. So state-owned gas boards carried out an enormous project:
the conversion of 13m buildings to a new heating technology. An army of
contractors was recruited and enlisted for the task. “It seems quite wrong
that, after two weeks’ training, ex-bus conductors, postmen and so forth can
walk in and take one’s cooker to bits,” complained one housewife. No
premises could be spared: a group of workers sent to Soho, home to
London’s red-light district, found they had to wait in line to enter “one of the
more dubious” clubs.

The chairman of British Gas hailed the completion of the project in 1977 as
perhaps the greatest the country had carried out in peacetime. Yet it looks
trivial compared with the challenge Britain and others now face: to heat all
homes without emitting carbon dioxide. British officials estimate that, to
meet the target of net-zero emissions, 28m-29m houses need reworking. The
cost in the 1960s and 1970s was about 1% of annual GDP. If climate-
friendly air-source heat pumps are the dominant technology in today’s
transition, the probable bill will be worth 17% of 2019’s GDP, says the
Office for Budget Responsibility (OBR), the fiscal watchdog.

And that is only one sector. To hit the net-zero targets to which 91% of the
world economy is now committed, many other transformations are
necessary. Roads need ubiquitous charging-points for electric vehicles (EVs)
that will replace internal-combustion engines. The technologies to make
cement or fly aeroplanes cleanly but inexpensively, or to capture carbon
emissions from those industries, must be found. Above all, electricity
supplied to the grid must be clean—and grids must be upgraded to cope with
higher demand when everything runs on electricity.

The project is thus vast and expensive. Advocates of green investment have
often presented this as an advantage: big infrastructure investment would be
part of a “green new deal”, funded by cheap government borrowing, that
would be able to take up slack in the economy and provide a long-term
return in excess of interest costs. Even in the summer of 2021, after Joe
Biden had already passed a huge fiscal stimulus in America, IMF staff wrote
that a green investment push could “[boost] demand and employment and
[help] the recovery from the covid-19 pandemic”. More stimulus was always
welcome.

Timing is everything
Yet inflation has now made clear that there is too much spending in the
economy, not too little. Debt-interest costs are rising as central banks hit the
brakes. The appeal of a green fiscal stimulus has dissipated. Far from using
up slack, more public spending will now displace private-sector activity and
further raise prices. The model for green spending is no longer the green
new deal. It is Mr Biden’s Inflation Reduction Act (IRA), which contains
America’s largest slug of climate-related spending but reduces the deficit
slightly by raising taxes and beefing up tax enforcement.

The bad news is that the cost of the climate transition to taxpayers will be
much bigger than what is provided for in the act, or indeed in existing
legislation in the rest of the world. The IRA is estimated—with wide bands
of uncertainty—to close only about half the gap between America’s previous
trajectory, through which it would reduce its carbon emissions by about 30%
between 2005 and 2030, and the Biden administration’s target of a 50% cut.

The good news is that green investment is still affordable, for three main
reasons. First, the world is continuously replacing boilers, cars and power
plants regardless of any energy transition. Incremental spending to replace
them with green alternatives is much lower than the gross cost would be.
The McKinsey Global Institute estimates that an annual average of 9.2% of
GDP must be spent on physical assets to achieve net zero by 2050, but
reckons this is an increase of only 0.9% of GDP over current plans. The IMF
and the International Energy Association (IEA) similarly put the necessary
incremental investment over the next decade at 0.6-0.9% of cumulative
output.

The second reason is that the private sector will pick up much of the tab.
Households, for example, usually buy their own boilers and cars, and in the
rich world private firms are responsible for about 90% of all energy
investment. The OBR’s central scenario assumes that the British government
will pay about a quarter of the total cost of the transition (though it cautions
that the actual figure could “vary greatly”). The resulting need for public
investment is about 0.4% of GDP, on average, until 2050, a sufficiently
small number to allow the British government to plan to meet it from within
its existing investment budget. The IMF has found that most estimates of the
need for public-sector investment in the 2020s are of a similar magnitude,
ranging between 0.05% and 0.45% of cumulative GDP.

Forecasts of taxpayers’ share of the bill depend on whether other policies are
in place to encourage the private sector to invest in green technologies.
Businesses and households put money to work where the returns are
greatest. They will pony up the cash for net zero only if they are incentivised
to do so. A particularly important factor is the extent to which governments
impose carbon prices, which tilt the scales in favour of green investment. A
failure to price carbon is doubly costly: it forces the public sector to shoulder
more of the burden of investment, and deprives the government of a source
of income.
Philippe Aghion, an economist, and his co-authors have found that a 10%
increase in fuel prices increases by 10% a firm’s likelihood of investing in
green technologies. Households also respond to price signals. America,
where petrol taxes have been fixed in cash terms since 1993 and a federal
carbon-pricing scheme looks unlikely to pass Congress, has just extended to
2032 its tax credit for EVs as part of the IRA. In Europe, where fuel levies
are higher, the number of countries offering incentives for EVs is falling,
even as take-up grows. The stick of carbon pricing would make the carrot of
subsidies less necessary. Using subsidies without carbon pricing “is a sure
way to spend more than needed to achieve the desired goal,” writes Olivier
Blanchard of the Massachusetts Institute of Technology.

Fortunately, carbon pricing is expanding. Nearly a quarter of greenhouse-gas

emissions are priced, a doubling in five years, helped by the launch of
China’s emissions-trading scheme for gas and coal power plants. Most
carbon prices remain too low. But every dollar on the price makes
investment in clean energy sources more attractive for the private sector.

Although the economics of decarbonisation are manageable, it is the politics

that are hard

A final factor reducing costs for the public sector is that the green transition
will pay off, not just in mitigated global warming, but through greater
efficiency. One big pay-off comes from EVs. Partly because they rely less on
fluids than do internal-combustion engines, they require less maintenance.
They are more efficient and have lower running costs. Should battery
technology advance as expected, they will eventually be cheaper to buy than
petrol cars. Cheaper transport will benefit the economy, boosting growth and
consumers’ real incomes. These benefits may not be enough to offset the
costs of weaning the economy off fossil fuels. But once those costs are sunk,
there will at least be a pay-off.

And it is possible that things will go better still. Technical progress is hard to
predict, and economists have shown firms’ green innovation to be “path-
dependent”: the more a firm does, the more it is likely to do in future. The
history of renewable energy also suggests there is a steep learning curve,
meaning that, as more is produced, costs fall rapidly because of economies
of scale and learning-by-doing.
Here comes the sun
The strongest evidence for this is the collapse in the price of solar energy,
which became about 90% cheaper during the 2010s, repeatedly beating
forecasts. Should other green technologies follow the same pattern of large
falls in cost the world may find that net zero will eventually benefit both
growth and the public finances. (A big breakthrough in hydrogen fuel, for
example, could mean heating many homes using the existing gas network,
rather than having to install heat pumps.)

Although the economics of decarbonisation are manageable, it is the politics

that are hard. Timing is everything. Moving early and gradually gives
economies more time to adjust, allowing them to reap the benefits of path-
dependent green investment without much disruption. A late, more chaotic
transition is costlier. The OBR estimates that if Britain delays decisive action
on decarbonisation to the 2030s, the eventual cost of the project will raise its
debt-to-GDP ratio by nearly 45 percentage points.

Then there is the challenge of ensuring that the transition happens

everywhere. The rich world plus China now account for about two-thirds of
annual carbon emissions. Although Africa contains nearly a fifth of the
world’s people, the continent is responsible for just 3% of the emissions that
humans have ever put into the atmosphere. Yet by mid-century Africa’s
population will have grown by 75% and will be much richer than it is today.
Should its per-person emissions reach the level of India (about two tonnes a
year, compared with 16 in America), the continent’s annual emissions will
be roughly what America’s are today, calculates Jack Goldstone of George
Mason University. India itself will also see its population grow by nearly
20% by 2050 and, on present trends, its per-person emissions will rise.

If the world is to achieve net-zero emissions without hamstringing the

economic prospects of billions of people, the rich world must help
developing countries decarbonise as they grow. At the Copenhagen climate
summit in 2009, rich countries duly pledged to provide $100bn a year of
public and private finance to poorer countries by 2020 to help them mitigate
and adapt to climate change. The target is vaguely defined, but is clearly
being missed. Meeting it is not just a diplomatic challenge, but a technical
one, given the difficulty of promoting investment in poor countries in which
property rights can be insecure.

The difficulty of co-ordinating decarbonisation internationally is another

argument for early investment. The sooner the rich world invests in green
technologies, reducing their price, the more likely the benefits are to spill
over into the developing world, allowing them to pursue greener growth.
The impact of low solar prices, for example, is already visible in India,
which has almost a decade early met its target of 40% non-fossil-fuel
installed energy capacity by 2030. It is increasingly plausible that the
country’s clean energy capacity could overtake its fossil-fuel capacity within
the next decade.

The world needs more such wins. But can rich countries invest enough for
them? Europe’s energy crisis is speeding up its energy transition. High
fossil-fuel prices hurt in the short run but are comparable to a carbon tax in
their effects. In 2022 Europe will install 39GW of solar power, up 44% from
what was already a record in 2021, according to SolarPower Europe, a lobby
group.

In normal times the argument for debt-financing of climate investments

would be strong. It is more efficient to spread costs over time than pay for a
green splurge with sharply higher taxes. Yet high inflation and overheating
economies mean that this is no longer a good time to increase deficits. The
cash available for green investment may depend on whether politicians
decide to join central banks in their fight against inflation. ■
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expensive
The total cost

Adding up the fiscal drag from ageing, energy and

defence
The bill for the future looms ever larger
Oct 5th 2022

IN 2006 NATO members set a target for defence spending of 2% of GDP. In

2014, after Russia annexed Crimea, they pledged to meet this target by 2024.
But by 2021 most countries still fell short: averaging across western Europe,
defence spending was only 1.6% of GDP. Some big countries—Germany,
Italy, the Netherlands and Spain—were the worst offenders, spending just
1.3-1.5%.

After Russia’s invasion of Ukraine in February, European governments once

again promised to reach the target. The Netherlands now says it will hit 2%
in 2025; Italy will do so by 2028. Germany says its spending will exceed the
2% target at an unspecified date. In Britain, which spent 2.2% of GDP on
defence in 2021, the new prime minister Liz Truss wants to spend 3% of
GDP by 2030.
Such pledges create more long-term pressure on government budgets, on top
of ageing and net zero. The Economist has added them all up. The big
uncertainty surrounds the energy transition, for which we apply the midpoint
of estimates surveyed by IMF staff: an average of 0.2% of GDP a year. This
includes only the investment costs of decarbonisation, so assuming that
revenues from taxing fossil fuels will be replaced as pollution falls. For
forecast changes to health and pension spending, we use IMF forecasts,
which include a projection of growth in health-care costs based on historical
trends.

The total extra annual fiscal squeeze from these three sources by 2030 is in
the region of 2-3% of GDP. That is a manageable figure, but a painful one.
In all the countries in our analysis the tax burden, as a percentage of GDP, is
already at or close to its historical maximum. Funding this extra annual
spending purely from higher revenues would take taxes to unprecedented
levels.

The alternative of debt financing may work for a while, especially in

Germany, which has the lowest debt-to-GDP ratios among big European
economies. However, this is not a sustainable solution, because the fiscal
pressure will last for decades. Eventually room to borrow more will be used
up, even when interest rates are low. Moreover, the pressure on budgets will
continue after 2030 as Europe goes on ageing.

In Italy there is not even room for manoeuvre in the near term. It already has
huge net debts of nearly 140% of GDP. At an average financing cost of
around 4.5% (roughly its current ten-year bond yield), inflation around 2%
(the ECB’s target) and economic growth around 1% (an optimistic forecast
once post-pandemic catch-up is exhausted) it needs a budget surplus before
interest of nearly 2% of GDP just to stop its debt growing faster than its
economy. A financing cost of 5% would push the required surplus to over
2.5% of GDP.

Italy has achieved surpluses of this size before, and it is getting a boost from
the European Union’s recovery fund. But an additional fiscal drag of 2.9%
of GDP, by our calculations, will make surpluses much harder to deliver.
And on current projections Italy’s median age will not peak until the 2060s.
■
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ageing-energy-and-defence
The long road back

The inflation problem will get better before it gets

worse
When current disruptions recede, the underlying rate of inflation will
remain higher than before the pandemic
Oct 5th 2022

IN 1978 MILTON FRIEDMAN looked back at three recessions that had

struck America’s economy over the preceding decade. “Each scenario has
been the same,” he wrote. Loose money created a boom and then inflation.
An outcry against rising prices led to higher interest rates and a recession,
only for rising unemployment to catch more public attention. So economic
policy turned stimulatory. Just as inflation began to fall, another boom
kicked off. The inflationary cycle began again.

The world economy is now in the early stages of Friedman’s loop. Inflation
has played havoc with central banks’ credibility and crushed consumer
confidence. In Europe high gas prices will cause economic turmoil this
winter; consumers are more miserable even than during the financial crisis.
In Asia, which seemed immune to the inflation bug, dearer oil and falling
currencies have forced central banks to raise interest rates. Policymakers are
now focused on a single enemy: rising prices. The issue is whether they will
hold their nerve as monetary hawkishness takes its toll.

It might seem hard to believe, as Europeans don thicker jumpers and turn
down thermostats, but inflation-busters are benefiting from some easy wins.
The oil price is about 25% down from its peak in June, and food prices are
more than 10% down. Disruptions to supply chains from the pandemic are
easing: the Baltic Dry index, which measures the cost of shipping goods, has
recently been lower than at any point since mid-2020. Headline inflation
seems to have peaked in America. Even European energy prices have fallen.
In any case they cannot keep rising at an extreme pace. If they merely
plateau, that will bring inflation down, because it measures changes in
prices, not their overall level.

But when the tide recedes, the beach reappears. As the energy crisis and
supply-chain disruptions fade, the underlying rate of inflation will be higher
than before the pandemic, for several reasons. Economic stimulus during the
pandemic, totalling 10% of global GDP, has caused overheating. Eighteen
months of high inflation have raised expectations for price rises, which can
be self-fulfilling. And in many countries tight labour markets threaten to
inject into wages a momentum of their own.
So long as energy chaos reigns, underlying inflation is hard to gauge. One
method is to look at “core” prices excluding energy and food. Yet energy is
an input for almost everything else, from restaurant meals on cold winter
nights to the ammonia used in fertilisers. Energy prices thus infect even core
prices as businesses pass through higher costs. To judge underlying inflation
it is better to look at how fast wages are growing relative to workers’
productivity.

Goldman Sachs, a bank, produces composite measures of annual wage

growth in 12 countries and the euro zone. The Economist has compared
those figures—and other data for South Korea—with average annual
productivity growth since 2000. The gap between the two is largest in the
Anglosphere: in America, Britain, Canada and New Zealand, it ranges from
3.8% to 4.6%. Next comes Europe: in the euro zone the average gap is 2.4%
(though it is higher in some countries). Last come Asian economies. Trend
inflation in both Japan and South Korea is little over 1% by this measure.

Such figures may seem reassuring when compared with today’s sky-high
headline rates of inflation. Yet they may still be worrying when considered
in light of the “sacrifice ratio”, the amount of pain that it takes to purge an
economy of an inflation problem. It is a subject economists have largely
ignored for the past three decades because inflation has been low.

In a blog post in June Stephen Cecchetti and Kermit Schoenholtz surveyed

ten American disinflationary episodes since the 1950s. A median fall in core
inflation of two percentage points was achieved over a 30-month period only
with a rise in unemployment of 3.6 percentage points, corresponding today
to nearly 6m Americans losing their jobs. Jason Furman of Harvard
University suggests that unemployment might need to rise by five
percentage points for a year to bring inflation down a single percentage
point. In a recent speech Isabel Schnabel, a member of the European Central
Bank’s executive board, warned that a weaker relationship between
unemployment and inflation—a phenomenon that had made central bankers
complacent about the risks of overheating—could now make inflation harder
to bring down.

Counting the costs

Two particular uncertainties determine how painful it could be in America,
as set out by Laurence Ball of Johns Hopkins University and Daniel Leigh
and Prachi Mishra of the IMF in a recent paper. One is how much inflation
expectations drift upward as inflation continues to persist above the Fed’s
2% target. The other is whether the labour market can cool off not by
shedding jobs but by shedding job vacancies, which have been
extraordinarily high during the recovery from covid-19.

In June the Fed projected that unemployment would rise only marginally
from 3.7% today to 4.1% by 2024. Plugging this into their model, Mr Ball
and his colleagues find that the rate of underlying inflation by December
2024 varies from 2.7% to 8.8%, depending on assumptions about
expectations and vacancies. It takes a bigger rise in unemployment to narrow
the range of inflation outcomes and centre it near the 2% target. The authors
find that a scenario suggested by Lawrence Summers of Harvard University,
in which unemployment rises to 7.5% and stays there for two years, leads to
inflation of 1.6-3.2% by the end of 2024.

Will policymakers tolerate such a sacrifice? The costs of disinflation can be

high but not controlling inflation would mean “far greater pain”, Jerome
Powell, chairman of the Federal Reserve, told fellow central bankers at this
year’s jamboree in Jackson Hole, Wyoming. Andrew Bailey, governor of the
Bank of England, promises to bring inflation to 2% “no ifs, no buts”.

Even where underlying inflation has yet to take off, central bankers have
acted. The Bank of Korea has raised interest rates from a low of 0.5% in
mid-2020 to 2.5% in August. In an interview with The Economist, Rhee
Chang-yong, the bank’s governor, said that there is no need to generate a
recession “on purpose”—his objective is mainly to stop imported inflation
from setting off a wage-price spiral. The recent global economic slowdown
and falling energy prices had made inflation less likely to rise further. But if
it did move up to American levels, the bank would think “very hard” about
the trade-off.

Central bankers seem prepared for possible discomfort. But the inflationary
risk no longer stems from monetary policy that is too loose but from
politicians in charge of fiscal policy. As inflation rises even governments
previously committed to budget discipline are spending freely to help
households and firms cope with higher energy and food prices. In April the
IMF counted 94 countries that had taken such measures in 2022. Liz Truss,
Britain’s prime minister, has both capped energy bills and slashed taxes. Mr
Rhee may be committed to fighting inflation but the South Korean
government, though promising to follow fiscal rules and reduce spending,
plans to cut corporate and income taxes.

It is not just that looser fiscal policy stimulates the economy, boosting
inflation in the short term. Ultimately, the power of central banks depends on
politicians pursuing sound fiscal policies that stabilise debt as a share of
GDP. Higher interest rates are supposed to help produce modest fiscal
austerity, because to maintain stable debts while paying more to borrow,
governments must cut spending or raise taxes. In 1981 Thomas Sargent and
Neil Wallace showed, in a paper titled “Some Unpleasant Monetarist
Arithmetic”, that without this fiscal backup, monetary policy eventually
loses traction. Higher interest rates become inflationary, not disinflationary,
because they simply lead governments to borrow more to pay rising debt-
service costs.

The power of central banks depends on politicians pursuing sound fiscal

policies

The risk of monetary unmooring is greater the more public debt rises,
because interest rates become more important to budget deficits. Even
before the pandemic, some economists were getting nervous about a
potential conflict between monetary and fiscal policies. David Andolfatto,
now of the University of Miami, and Andrew Spewak of the St Louis Fed
warned in 2019 that, in part because of Donald Trump’s deficit-busting tax
cuts, America could face “the perfect inflation storm” in which “it is not
entirely clear what the Federal Reserve might do”. Those worries have since
grown. In September Christine Lagarde, the ECB’s president, warned that
“monetary and fiscal policy play a complementary role in fighting price
pressures” and that they “must work hand in hand and not contradict each
other”.

A growing number of economists agree. In a paper presented at Jackson

Hole, Francesco Bianchi of Johns Hopkins University and Leonardo Melosi
of the Federal Reserve Bank of Chicago revisit America’s disinflation under
Paul Volcker in the 1980s and argue that it was “the result of changes in both
monetary and fiscal policy”. Although Ronald Reagan cut taxes in August
1981, a series of deficit-reducing measures followed over the rest of the
decade, and Reagan’s hawkish rhetoric contributed to a change in the fiscal
regime. It was only once policymakers firmly established fiscal
consolidation that inflation settled at low levels. Mr Bianchi and Mr Melosi
argue that without greater backup from fiscal policy, central banks risk
“fiscal stagflation”, in which higher interest rates kill short-term growth but,
owing to the lack of budgetary backing, prove unable to bring inflation
down.

How plausible is it that politicians will co-operate with central bankers? As

the world again enters the phase of Friedman’s loop when the public worries
about a slowing economy, they may prefer to dole out cash, not add to the
pain. They may not even mind much if this stops inflation falling back to
2%, because some extra inflation could make budgeting easier. Higher prices
erode the real value of long-term government bonds. There is a windfall
from transitioning to a permanently higher inflation rate which investors did
not price in at the time the bonds were sold. It is bigger the more long-term
debt a country has issued.

The Economist has made a rough calculation of the pay-off to governments

in large economies if they shifted from trend inflation of 2% to 4%. We take
the weighted average maturity of a country’s bonds, excluding central-bank
holdings that are part of the public sector. We then calculate how much the
present value of a zero-coupon bond of that maturity would fall on account
of higher inflation. In most cases, it is enough to reduce the value of public
debt by around 10%. As a percentage of GDP the windfall ranges from 7%
in America, whose debts are of a fairly short maturity, to 21% in Japan,
whose debts are enormous. Britain rakes in 14% of GDP, thanks to an
unusually high share of long-dated debt (though it also has a large number of
inflation-linked bonds whose value would rise). The one-time gains are of a
comparable magnitude to the fiscal costs of the pandemic—a pay-off that is
high because public debts are so large.

The power of inflation to erode debts is why economists are so particular

about central bankers’ institutional independence. They worry about “fiscal
dominance”, whereby governments put political pressure on their central
banks in order to keep rates low. There was plenty of this going on as
inflation took off in the 1960s: Lyndon Johnson tried to bully William
McChesney Martin, the Fed chairman, by driving him around his Texas
ranch at breakneck speed.

The trouble is that even fiercely independent central banks cannot force
politicians to keep their budgets in order. Big deficits can, in effect, lead to
fiscal dominance at arms’ length. It is this threat that hangs over the
credibility of promises to bring inflation down—but which might yet
produce a beneficent change in the world’s macroeconomic regime.■
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better-before-it-gets-worse
The end of 2%

Policymakers are likely to jettison their 2%

inflation targets
Some by choice, some by accident
Oct 5th 2022

THE LAST time rich economies conquered inflation it ushered in a decades-

long era known as the “great moderation”. From the mid-1980s to 2007
growth was steady, inflation was low and economists celebrated their own
“end of history”: the triumph of inflation-targeting technocracy over the
naivety of 1970s policymaking. The economy was steered by a simple
division of labour. Central banks would use monetary policy to keep
inflation on target—typically at 2%—while governments would keep debts
under control and focus on supply-side reforms.

This stability was shattered by the financial crisis. The 15 years since have
exposed flaws in the macroeconomic regime. When interest rates fell to
zero, central banks could not easily cut them further, making recovery from
the crash slow and painful. When the pandemic struck, policymakers feared
a repeat and so reached for alternatives: an enormous expansion of
government spending and quantitative easing (QE), the buying of public
debt with newly created money, whose full effects were poorly understood.
The experiment went wrong, particularly in America. Inflation returned with
a vengeance, and has since been worsened by an energy crisis—the response
to which in Europe has been another round of government spending on a
vast scale.

Today, as the balance of economic power tilts from technocrats towards

politicians, it is unclear whether inflation can be brought back to the 2%
target. Central bankers are keen to follow the path of the 1980s, imposing
growth slowdowns—and, if necessary, recessions—to reach their goal. But
the enormous support for households and businesses during the pandemic
and the energy crisis has fed expectations that downturns will be met by
government handouts, not welcomed as a cure for inflation. Although voters
may be angry about the rising cost of living, they will lament higher
unemployment once it hits. And if the energy crisis abates inflation will fall
from today’s sky-high rates to a level that will still be above 2%, but may
seem more politically tolerable, in part because rising prices will be matched
by rising wages.

What has become clear is that 2% inflation is ill-suited to present

macroeconomic conditions

The good news is that out of crisis springs opportunity: to fix a fundamental
problem with the system. Interest rates have fallen close to their zero lower
bound in part because societies have aged, creating a global glut of saving
and a dearth of investment opportunities. These conditions determine the
real (ie, inflation-adjusted) rate of interest in the long term, and are not going
away. Yet for any given real rate, higher inflation raises the nominal rate that
can be set by central banks. As a result, long before the pandemic, many
economists were arguing in favour of a modest increase in the inflation
target, to 3% or 4%, to get rates away from zero and build up monetary-
policy firepower.

Before 2021 the idea seemed distant and academic. Inflation was too low; it
would be naive to aim higher. Today, a change of target would be simple to
make. Policymakers should reduce inflation to 4%, say, and then stop.
Though monetary policy would be more doveish in the short term, rates
would eventually settle higher than they would have been under a 2% target.
Central banks would get their mojo back.

Is such a switch viable? In the short term there would be costs and benefits.
There would be no need for a deep and unpopular disinflationary purge,
reducing the danger of conflict between central banks and politicians.
Governments would not need to worry that spending on security or on long-
term climate investment might interfere with central banks’ desire to
squeeze economies. There would even be a budgetary windfall. Moving
from a target of 2% to 4% would inflate away some long-term public debt
that, on average across five big economies, would be roughly equivalent to
the rise in public debt during the pandemic.

The big downside would be a knock to the credibility of policymakers’

promises. Having been burned once, buyers of long-term government bonds
might fear the inflation target could be raised again, adding a risk-premium
to bond yields and creating long-term uncertainty. Inflation of 3-4% would
be that little bit more noticeable than 2%, imposing a psychological burden
on the public and creating some friction throughout the economy. There
would be arbitrary redistribution from creditors to debtors.

Yet this trade-off is minor set against the benefits of escaping the zero lower
bound and returning to a system in which interest rates play the main role in
fighting recessions. Milder downturns are an enormous economic prize. If
monetary policy had had more firepower over the past 15 years, the slump of
the 2010s would have been shallower. The mistakes that led to the post-
pandemic overheat would have been less likely. Governments would have
been less indebted. There could have been less QE.

One problem would remain. Just as in the old system, the power of central
banks to control inflation would require governments to keep debts stable as
a share of the economy in the long term—a commitment that is now under
threat. The crises of recent years will be followed by more spending on
pensions and health care as societies age, as well as a mass decarbonisation
project that will cost more the longer it is delayed. Politicians of all stripes
fear the prospect of cutting spending on elderly voters more than they fear
deficits.
It would therefore be wise to pair any change to the inflation target with
long-term reforms to control pension and health-care spending, to put public
finances on a more stable footing. The one-time fiscal windfall from the new
regime would provide some breathing space. But adjusting the inflation
target must not become the go-to escape valve whenever budgets are tight.

There are broader options for deeper reform. A higher inflation target could
be embedded into an overall goal for the level of nominal GDP, the total
amount of cash growth in the economy, a gauge that is better suited for a
world of supply-side shocks like the energy crisis. What has become clear is
that inflation held to 2% is ill-suited to 21st-century macroeconomic
conditions. And if the target is not changed, there is a great risk that it will
simply be missed. Better to construct a new macroeconomic regime
carefully than just to wait for the old one to collapse. ■
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jettison-their-2-inflation-targets
Business

Bulletproof suits
Cleaning up its act
The magic formula
A new look
The odd couple
The hard edge of the cloud
Bulletproof suits

Where next for management’s consiglieri?

Forget the scandals. McKinsey and its peers are more powerful than ever
Oct 4th 2022

THE CEO-WHISPERERS of Bain & Company, Boston Consulting Group

(BCG) and McKinsey, the trio at the pinnacle of management consulting, are
accustomed to operating in the shadows. Of late, though, they have been
thrust into the light by scandals. Bain has come under fire for gutting South
Africa’s tax office. BCG has been criticised for its close ties to Saudi
Arabia’s autocratic de facto ruler, Mohammed bin Salman, and for allegedly
profiting from corruption in Angola. In a new exposé published on October
5th, “When McKinsey Comes to Town”, Walt Bogdanich and Michael
Forsythe of the New York Times pile on with a harrowing account of decades
of dishonourable exploits at McKinsey, the biggest name in the business.

Allegations covered in the book include helping opioid manufacturers

peddle their products to addicts, encouraging insurers to slash claims
payouts to motorists and profiting from ill-gotten contracts with state-owned
companies in South Africa, a charge for which the country’s prosecutors
announced criminal proceedings on September 30th. McKinsey says that the
book “fundamentally misrepresents our firm and our work” and that “the
charges filed against our South Africa office are meritless and we will
defend against them.”

Still, it had previously apologised for its work with South African state-
owned enterprises and its support of the opioid industry, beefed up risk and
legal functions, and put in place tighter rules for signing off projects before
they begin. Last year, as the scandals were piling on, it defenestrated its
boss, who appears to have paid the price for goings-on that mostly happened
before his watch. Bain has also said sorry for its work with South African
taxmen, introduced new layers of governance and set up a whistleblower
hotline. BCG has said that its work in Saudi Arabia has focused on areas that
could “positively contribute to economic and societal transformation” and
that the firm has turned down work that goes against that principle.

This bout of soul-searching is welcome. For despite the scandals, the

consultants’ clout is, if anything, on the rise. Between them, the elite trio
advise the world’s largest companies on their most consequential decisions,
and many governments, too. (The author of this article used to work for
Bain.) Clients are happy to pay eye-watering sums for this counsel. Messrs
Bogdanich and Forsythe report that McKinsey earned $50m from Chevron,
an American oil giant, in 2019, $30m from Altria, a tobacco company, in
2018 and 2019, and $13m from US Steel between 2018 and 2020. It also
made $1bn in fees from America’s federal government between 2009 and
2021.
Between 2015 and 2020 the combined revenue of the three firms roughly
doubled, to $24bn, estimates Kennedy Research Reports, an industry-
watcher (see chart). A bumper 2021 may have seen takings near $30bn,
according to Consultancy.org, which tracks the business, as clients wrestled
with supply-chain and other issues spawned by the covid-19 pandemic. And
the consultants are offering an ever wider range of services, including help
with implementing the consultants’ counsel. “Clients now demand more
than just advice. They want our help in underwriting outcomes,” says Bob
Sternfels, boss of McKinsey. Christoph Schweizer, boss of BCG, agrees:
“Over time, our work has shifted from advising to advising and building.”
That means bigger, longer projects, and juicier fees.

Part of the consultancies’ growth has come at the expense of rivals that have
struggled to keep pace with the dominant three. Over the past decade smaller
firms like Booz & Company, Monitor and Parthenon have been snapped up
by the big accounting firms—PwC, Deloitte and EY, respectively—which
have sought to build premium consulting arms that can go head-to-head
against the MBB, as the elite trio are known. The results have been mixed,
with some accountancy firms struggling to hold on to top talent after the
acquisitions. As a result, the pointy end of the consulting business has
confirmed one of its own maxims: a stable competitive market never has
more than three significant competitors.
The three firms have also benefited from structural changes. One is the craze
for environmental, social and governance (ESG) considerations, which ever
more businesses are taking into account in addition to financial ones. The
relative novelty of ESG means that few bosses know even where to start. In
such cases bringing in outside experts makes sense. The consulting trio are
now offering services to help clients decarbonise, improve diversity or
otherwise become more virtuous. Whether or not their clients can do well by
doing good, the consultants themselves are certainly profiting from the ESG
craze: BCG already earns around 10% of its revenue from climate change-
related consulting.

An even bigger growth area is digitisation. Fearful of their firms becoming

the next Borders or Blockbuster, two victims of the digital revolution, chief
executives are willing to pay top dollar for help with things like selling
products online, automating routine work or sprucing up Byzantine IT
systems. Demand for help with digitisation is accelerating in line with the
pace of disruption, notes Mr Sternfels.

As with ESG, many companies lack in-house know-how about how to do it

well—or at all. The consultants, by contrast, have often been thinking about
it for years and, given their broad client base, have a good grasp of sectoral
and economy-wide best practice. They have also been beefing up their
digitisation practices by buying outfits with expertise in areas like big data
and online marketing. It helps that the trio can point to their own successful
digital transformations. Manny Maceda, boss of Bain, recalls how the most
advanced tool at his disposal when he first started at the firm in the 1980s
was a calculator. Today’s consulting teams are armed with suites of purpose-
built software that take much of the grunt work out of jobs like
benchmarking costs, freeing up more time for important things like talking
to clients and understanding their business challenges.

The consultants’ glory days may not last for ever. Competition may stiffen;
in May EY decided to spin off its consulting arm to unshackle it from the
stodgy audit business. The ESG movement is facing a backlash, especially
in America, where the political right decries it as woke capitalism. At some
point, most companies will have digitised. If those growth engines sputter,
pursuit of fresh business could propel the consultants into the arms of
controversial clients in riskier places. That in turn could deter the industry’s
most important raw material: brains. “Our product is our talent,” as Mr
Maceda says. And talent is a scarce resource—especially the sort that is
willing to work the punishing hours expected of MBB-ers.

These are genuine threats, but not imminent ones. Both ESG and digitisation
probably have years’ worth of business in them yet. Having had their fingers
burned in countries like South Africa and Saudi Arabia may have tempered
consultants’ appetite for more of the same. As for brains, among MBA
graduates interest in consulting is as strong as ever, in contrast to a waning
appetite for investment banking. Overall application volumes have
apparently kept pace with the number of available slots, as firms have
targeted candidates from less traditional backgrounds like medicine and
science, and looked beyond the elite universities that historically provided
the lion’s share of hires.

Aspiring consultants may believe, rightly or wrongly, that the sundry

scandals represent isolated instances of past bad behaviour and that new
safeguards put in place will prevent them from happening again.
Alternatively, they simply don’t care, relishing the intellectual challenge, the
pay cheques and the career leg-up that comes courtesy of a stint at MBB.
Either way, the world’s chief executives need not worry about the whispers
in their ears falling silent soon. ■

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markets, sign up to Money Talks, our weekly newsletter.
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Cleaning up its act

RWE, Germany’s biggest power company, is going

green
But are its plans ambitious enough?
Oct 6th 2022 | BERLIN

IT HAS BEEN one of Europe’s dirtiest companies for more than a century;
now RWE is aiming to be among the cleanest. Germany’s largest power
generator has recently taken two big steps towards this goal. On October 1st
it agreed to buy the renewable-energy business of Consolidated Edison
(ConEd), an American utility, for $6.8bn. Three days later it signed an
agreement with Germany’s regional and federal governments to bring
forward plans to stop generating electricity with lignite, an especially filthy
sort of coal, by eight years to 2030. But is this enough to burnish its green
credentials?

RWE has become a household name in its home country as an operator of

nuclear plants and lignite mines—which has made it the target of many a
protest over the years. In 2019, for instance, activists camping in dozens of
treehouses stopped it from clearing what was left of the Hambacher forest, a
once-vast tract of woodland in western Germany, in order to continue
mining lignite. The recent announcements are part of a much bigger
realignment. In November last year it unveiled plans to invest €50bn
($50bn) to increase renewable-power capacity from 25 to 50 gigawatts
(GW) within eight years, about a third of its current total.

In combination, the two recent deals show that RWE is on the right path,
says Vincent Aryal of JPMorgan Chase, a bank. ConEd’s 3GW renewable
business will make RWE America’s fourth-largest provider of green energy,
but also comes with a pipeline of wind and solar projects of over 7GW. The
agreement in Germany raises the prospect that RWE could exit from coal
even earlier than 2030. Markus Krebber, the firm’s boss, told analysts that its
lignite business is likely to be hived off as a non-profit foundation as soon as
the current energy crisis ends and German politicians have the time to give
regulatory approval.

Yet some investors argue that RWE is not ambitious enough. Other big
European utilities have more sweeping plans, says Benedikt Kormaier of
Enkraft, an activist fund which owns a small stake in RWE. Enel, an Italian
firm, and Iberdrola, a Spanish one, want to reach 129GW and 95GW,
respectively, in green power-generation capacity by 2030. This, combined
with the fact that it will have a large legacy business for some years, means
that RWE’s valuation is lower than it should be, notwithstanding the
prospect of a very profitable year and its rising share price, says Mr
Kormaier. The financing of the ConEd deal shows this, he points out. The
Qatar Investment Authority (QIA), the country’s sovereign-wealth fund,
contributed €2.4bn of cash for the deal and will henceforth own 9% of RWE.
But it only paid about half the multiple for its stake in RWE that RWE
shelled out for ConEd’s renewable business.

Perhaps the QIA is a beneficiary of the wheeling and dealing between

Germany and Qatar. When Chancellor Olaf Scholz toured the Middle East in
September, Qatar was one of the stops. Germany’s government hopes that
the resource-rich Gulf state will one day provide exports of liquefied natural
gas to replace imports from Russia. With QIA now becoming RWE’s largest
shareholder, the gas is more likely to start flowing.■

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markets, sign up to Money Talks, our weekly newsletter.
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going-green
Bartleby

The magic formula of management

Five numbers, one connecting idea
Oct 6th 2022

THIS IS THE age of the data scientist. Employers of all kinds prize people
with the skills to capture and analyse enormous amounts of information, to
spot patterns in the data and to turn them into useful insights. But some of
the most valuable figures in business need neither an analytics team nor
knowledge of Python. They are simple to remember and useful for bosses in
every organisation. Here is a small selection of management’s magic
numbers:

Zero: Doing nothing can be the most valuable thing a manager can do, as
the fable of Atwood’s duck demonstrates. Jeff Atwood, a computer
programmer, is credited with popularising the (possibly apocryphal) story of
a piece of deliberately unnecessary work that an animator did on a video
game called “Battle Chess”.

Aware that the higher-ups needed to feel that they were adding value by
making changes, the animator gave the character of the queen a wholly
extraneous pet duck. Sure enough, the reviewers asked the programmer to
do only one thing: remove the bird. In theory everyone ended up happy,
except the duck. In practice time had been wasted because people higher up
the chain needed to justify their existence.

One: This is the number of bosses people should have. In reality, matrix
structures and team-based approaches mean that lots of workers report to
multiple masters. According to a Gallup survey in 2019, 72% of American
employees occasionally or consistently work in different teams. This
approach can have benefits, but clarity is not one of them. The Gallup poll
showed that those who work in a matrix are less likely to know what is
expected of them, and more likely to spend their day festering in endless
internal meetings. Managers in matrix structures should at least try to make
their underlings feel like they have one boss, even when they do not.

Three: In a paper published in 2013 two academics tested whether there was
an optimal number of claims that marketers should make for their products
and services in promotional messages. They found that making three claims
was best: any fewer and consumers felt they lacked enough information to
make their minds up about a product; any more and they became sceptical
that the claims were authentic. The “rule of three” is useful in many other
settings, too, from points in presentations to pricing options for customers.
One place it does not apply is in a column about magic numbers, so:

Ten: The number of people who should be in a meeting depends not just on
what is being discussed, but also on where it is taking place. According to a
survey of British workers conducted in 2021 by Nicholas Bloom of Stanford
University and Paul Mizen and Shivani Taneja of the University of
Nottingham, the efficiency of online meetings declined steadily as the
number of participants grew. Zoom calls work best with between two and
four participants, when there is less need for people to keep muting and
unmuting, more chance to see people’s facial expressions and less chat-room
blather. Efficiency declines until ten people or more are involved, at which
point it is better to hold meetings in person.

150: Dunbar’s number postulates that the number of stable social

connections a human can have is roughly 150. First proposed by Robin
Dunbar, an anthropologist at Oxford University, the figure has its critics.
Some researchers reckon it is too low; introverts think it is ludicrously high.
But this group size recurs in many settings, from the congregations of
single-leader churches to networks of Christmas-card recipients. Companies
have also found that it has significance; passing the 150-person threshold
requires a change in management practices, from informal and
undocumented to structured and codified.

There is a pattern to these numbers. In one way or another, they illustrate the
risks of addition. Expand a company beyond a certain size and social bonds
will weaken. Invite more people to the meeting and you will wait longer at
the start as everyone dials in. Add extra reporting lines and the burden of
collaboration will spiral.

The idea that less is more is not new, of course. Max Ringelmann was a
19th-century French engineer who found that adding more and more people
to a rope-pulling team had an adverse effect on individual productivity. The
more people there were to tug on the rope, the less sense of responsibility
each person felt for the outcome and the less hard they pulled. Ringelmann’s
insight is still valid. Subtraction has its attractions. ■

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Read more from Bartleby, our columnist on management and work:

The deadly sins and the workplace (Sep 29th)
How not to run a virtual town hall (Sep 22nd)
How to get things done—eventually (Sep 15th)
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A new look

Fashion gets a modern makeover

A $700bn industry flirts with new materials, new countries—and new
clients
Oct 6th 2022 | Dubai and Paris

PARIS FASHION WEEK always makes heads turn. Two events that took
place during this year’s extravaganza, which concluded on October 4th,
made it dizzying. On September 29th a crocodile-skin Hermès handbag
became the priciest ever to be auctioned at Sotheby’s. It was the apotheosis
of old-school luxury: timeless, leather-bound and, at €352,800 ($346,800),
eye-poppingly expensive. The next day Coperni, a French fashion house
barely ten years old, showed off luxury’s whizzier side by spraying a nearly
nude supermodel with an ingenious and animal-friendly material that
coalesced into a snug white number (see picture).
This tug of war between tradition and novelty is nothing new in luxury
fashion. It is now becoming true of its makers’ business models, too. A post-
pandemic rebound in sales of personal luxury goods, to nearly €300bn (see
chart 1), conceals rising volatility within the industry. Investors who used to
treat large luxury groups such as LVMH, Hermès and Kering as pretty much
of a piece are now differentiating between them (see chart 2) as they adapt—
or not—to the new tastes of new shoppers in new places. In the process, an
industry with a market value of some $700bn is getting a new look.

The first change in the luxury market is geographic. Last century fashion
houses sailed the winds of globalisation from Europe and America to Japan
and then, in the past decade, China. As the Chinese economy slows and the
Communist Party turns the screws on the ultra-rich, firms are looking
elsewhere for growth opportunities, particularly to the oil-soaked Persian
Gulf, whose well-heeled shoppers are growing richer on the back of high
fossil-fuel prices. They are happy to splurge some of that wealth on fancy
fashion—and are becoming more adventurous in their purchases. This year
Loro Piana, an LVMH label, collaborated with an Emirati artist to create a
special Ramadan collection for its Middle Eastern shops.
The Gulf’s luxury hub, Dubai, may also be the world’s last true entrepot,
welcoming of anyone from anywhere, as long as their pockets are deep. The
flagship shop in Dubai of Louis Vuitton, LVMH’s leading brand, is popular
with Russian shoppers, who for reasons of geopolitics are finding it harder
to spend their cash in London, Milan, Paris or New York.

The luxury groups are eyeing other underexplored places, from Nigeria and
South Africa to India and Indonesia, albeit tentatively for now. In a more
profound shift, they are increasingly thinking of markets in terms of cities
rather than countries, says Anita Balchandani of McKinsey, a consultancy. In
March Gucci (owned by Kering) opened a boutique in Austin, full of rich
techies who during the pandemic left nannyish California for less locked-
down, lower-tax Texas. In December Louis Vuitton opened a menswear
shop in Miami, a city popular with crypto bros. As wealthy Chinese were
confined to their home cities by their government’s strict covid-19 policies,
luxury brands doubled down on outlets in second-tier places such as
Chengdu and Nanjing.

Regardless of where they live and shop, buyers are getting younger—a
second change facing pedlars of poshness. Between 2019 and 2021
Generation Z, those born between 1997 and 2012, increased its share of
global spending on bling from 8% to 17%—much faster than mere
generational turnover would imply. Together with Millennials (born in 1981-
96), it already accounts more than half of luxury purchases. Bain, another
consultancy, expects an increase to three-quarters by 2025.

The rejuvenation of its clientele has far-reaching consequences for the

industry, for the young have different ideas about what makes something
luxury. Long-established brands which, like Hermès, stress craftsmanship
and heritage have to think about attracting shoppers who care more about
self-expression and selfies.

This is leading labels to redefine the role of the creative director. The
position has always been critically important to fashion houses. But whereas
its occupants used primarily to act as guardians of a brand’s image, now they
are artistic visionaries with the freedom to redefine it. Alessandro Michele,
Gucci’s creative director since 2015, has made the 101-year-old label
synonymous with his signature animal and jungle motifs. Ideally directors
come with a cult following, like Maximilian Davis, a 26-year-old black
designer who was appointed to the job at Salvatore Ferragamo in March (in
an attempt to modernise, the brand has dropped the eponymous founder’s
first name from the logo). Brands are also looking for talent beyond
couturiers. Virgil Abloh, who until his death last year was Louis Vuitton’s
creative director for its men’s collections, started out designing streetwear.

The creative directors, in turn, are helping redefine what counts as luxury,
starting with materials. Fur is out; Kering announced a ban from all its
brands last year. Synthetic alternatives are in, even if not all are as high-tech
as Coperni’s spray-on dress. Stella McCartney, a self-styled vegetarian
designer, makes bags from fabric derived from mushrooms rather than
leather. In 2019 Prada launched a collection made of yarn recycled from
waste, with which it plans to replace all its petroleum-based nylon. The same
year Chanel invested in a biotech company developing synthetic silk. All
this allows labels to present themselves as environmentally sustainable, a
selling point with the Gen-Zs.
Besides new materials, luxury is embracing new styles. This summer Gucci
launched a collaboration with Adidas, a mass-market sportswear brand. The
collection includes trainers, tracksuits and, lest someone worry about things
getting too downmarket, a reassuringly lavish $17,500 dress. Citigroup, a
bank, estimates that Balenciaga, long a resolutely haute-couture brand (also
part of Kering), now derives 15-20% of sales from sneakers.

To rope in aspirational shoppers, labels are offering smaller items at

correspondingly lower prices. Jacquemus, a fast-growing independent brand,
is selling tiny bags; Prada, an Italian house, key rings; and Kering’s Bottega
Veneta, credit-card holders. Shopping assistants at (Prada-owned) Miu Miu
report strong sales of $200 hair clips, hardly cheap but a steal next to the
label’s $2,000-plus dresses.

All this creative and commercial commotion is unnatural for the luxury
industry, which “doesn’t like radical changes”, as Thomas Chauvet of
Citigroup points out. The risk of missteps is high. Investments in places like
Cape Town, Jakarta, Lagos and Mumbai, or even Austin and Miami, may
take years to bear fruit—and they may never catch up with Beijing and
Shanghai. To young ears attuned to the slightest hint of greenwashing,
sustainability talk can sound rich coming from companies whose products
are by definition never a necessity (and which used to incinerate unsold
goods rather than discount them and cheapen the brand).

Most important, attracting a new generation of shoppers before their prime

earning (and spending) years with lower-cost little luxuries may put off the
core super-rich customers, who still covet exclusivity above all. As one
luxury chief executive sums it up, products ultimately need to be “more
precious, more sophisticated”, so that you can sell fewer at higher prices.
“That’s the equation of luxury.” This much hasn’t changed. ■

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A social saga

Elon Musk is buying Twitter. Really. Probably

The reluctant suitor avoids a trial, but inherits a world of commercial and
legal woes
Oct 5th 2022

THE DEAL is on! Isn’t it? With Elon Musk’s courtship of Twitter, it is hard
to know. In April the world’s richest man agreed to join the social network’s
board, only to change his mind a week later. He then signed a deal to buy the
company, but within days was tweeting insults at its leaders. In July he said
the deal was off, prompting Twitter to sue. On October 3rd he said he would
buy it after all.

Does Mr Musk mean it this time? Markets think so: Twitter’s shares leapt
from $43 to $52, just shy of Mr Musk’s offer of $54.20. Twitter shareholders
had already okayed the takeover and antitrust regulators see no problem, so
the acquisition could close within days.

If it does, Twitter will have won the world’s highest-stakes game of chicken.
Mr Musk claimed he was backing out because Twitter had more “bots”, or
fake users, than it had disclosed (it denies this). But he surely regretted
spending $44bn on a company whose value by July had fallen below $30bn,
amid a rout of tech stocks. Many thought Twitter might offer Mr Musk a
discount, to avoid fighting him in court. Instead it is Mr Musk who has
blinked.

His case looked doomed: the bots argument was always thin. And whereas
Mr Musk might have hoped to pay only a termination fee of $1bn, the judge
repeatedly sided with Twitter in pre-trial hearings, raising expectations that
she would order Mr Musk to cough up the full $44bn should he lose.

He might have rolled the dice, but the trial’s discovery process was proving
damaging. On September 28th the court released 33 pages of cringe-worthy
text messages between the magnate and his business pals. “You have my
sword,” promised Jason Calacanis, a would-be Twitter investor, quoting
“The Lord of the Rings”. “Put me in the game coach!”

If dodging the trial solves one problem for Mr Musk, owning Twitter will
present others. Advertising, Twitter’s revenue source, has been hit by war in
Europe and broken supply chains in Asia. Twitter’s staff mistrust Mr Musk
and will like him even less when he starts slashing costs. He will need a new
chief executive after a public spat with the incumbent, Parag Agrawal, one
of few to emerge from the debacle with his reputation intact.

Trouble is brewing in Washington, too. On October 3rd the Supreme Court

said it would hear two cases about social media. One, against Google’s
YouTube, seeks to make tech platforms responsible for the content their
algorithms recommend. The other, against Twitter, argues that platforms abet
terrorism by hosting sympathetic material. Either case could destroy the way
Twitter and other social networks operate. Mr Musk has all this to look
forward to—and for only $44bn.■

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probably
Schumpeter

The cloud is the fiercest front in the chip wars

Data-centre chips were once a stale monopoly. Now the business is
brimming with competition
Oct 6th 2022

IT IS EASY to think of the computing cloud as the placeless whereabouts of

the latest Netflix series, your Spotify playlists, millions of wanton selfies
and your digital assistant. It is even easier to ignore it altogether, at least
until Alexa alerts you that your storage space is filling up and helpfully
offers to rent you extra room, of which there always appears to be more
available. Necessary, disembodied and, for $9.99 a month, to all intents and
purposes limitless: it is the ether of the digital age. This ether, though, has a
very unethereal side—the vast data centres where all this information is
physically stored and, increasingly, processed by powerful computers known
as servers. The semiconductor hardware that makes the servers powerful is
fast becoming the hardest-fought front in the battle over the $600bn global
market for computer chips.

Rooms of servers began to replace computer mainframes in the 1990s. Back

then, they were owned by companies and installed on their premises. They
mostly ran on chips made by IBM and HP, the big tech of the day. These
were supplanted by processors from Intel, which by the mid-2000s
translated its dominance of PC semiconductors into a near monopoly of the
server market. Things started to change once again around a decade ago,
when Amazon began selling some of its spare server capacity. Microsoft and
Google followed suit and the cloud-computing industry took shape. As the
cloud has billowed, so has Intel’s competition.

Today the market for server processors is getting bigger, more crowded and
more complex. (The business of memory chips, which store data rather than
crunch it, is distinct, more commoditised and less lucrative.) Intel, which
both designs and manufactures semiconductors, derives 33% of its revenues
from server chips, up from 29% in 2016. Specialist chip designers that do
not do their own manufacturing are expanding their server-chip businesses
even more quickly. Data centres now account for 39% of the sales of Nvidia,
up from 7% six years ago. For AMD, another American chip designer, the
figure has jumped from 17% to 23% between 2020 and 2021. The big cloud
providers, including Amazon and Google, are getting in on the game by
designing their own processors, often based on blueprints from Arm, a
Japanese-owned firm which licenses off-the-shelf designs that clients can
tailor to their needs. The designs are then etched onto silicon by contract
manufacturers, most notably TSMC of Taiwan, which are also increasing
their server-chip capacity.

Two factors explain the competitive storm. The first is the market’s size and
growth. Data-centre chips are a bright spot in an otherwise dark year for the
semiconductor industry, which is in the grip of a cyclical downturn that has
wiped two-fifths from the market value of the world’s chipmakers this year.
Whereas sales of PCs and smartphones, and the chips inside them, are
expected to fall this year, server demand is forecast to rise. Synergy
Research Group, a firm of analysts, expects the cloud giants to build more
than 300 new data centres around the world by 2024. The biggest of these
could house at least 100,000 servers apiece. That will require an awful lot of
chips. According to IDC, another research firm, cloud and on-premise data
centres will buy $71bn-worth of semiconductors in 2022, up from $42bn in
2019. Sales may grow by nearly half in the next five years or so, twice as
fast as the chip industry as a whole. Most of that growth will come from
processors rather than memory chips.
The second reason for the upheaval is the growing sophistication of what the
cloud does. It no longer acts merely like a large external hard drive. It is
bursting with new capabilities that require different chip architectures. In
some cases, that means repurposing existing technology. Nvidia’s cloud
business is built atop its graphics processing units (GPUs), specialised chips
used to make computer animation lifelike. It turns out that GPUs, which
were first designed in the 1990s to improve video games, are also excellent
at running artificial-intelligence (AI) models. Intel recently launched its first
set of stand-alone GPUs to compete with Nvidia as well as AMD, which
also makes them.

Cumulo-nimble
All-new designs are also emerging. The cloud giants, looking to boost
performance and cut costs, are busily adapting Arm’s energy-efficient
designs. Amazon’s Arm-derived Graviton chips are being sown across many
of its server farms. Google is doing the same with its Tensor Processing
Units. Microsoft is working on custom designs for its Azure cloud. In 2020
Nvidia offered to buy Arm for $40bn, in large part to beef up its cloud
offering. That deal collapsed in February amid antitrust scrutiny, but the
company nevertheless plans to launch a general-purpose server chip next
year to take on Intel more directly.

One clear winner from the cloud boom is TSMC. It is the only company
currently able to manufacture the bleeding-edge processors most sought-
after by the cloud providers. Intel hopes that its recent technological
advances and entry into the contract-manufacturing business—together with
$52bn in new American subsidies for domestic chipmaking—will help close
the gap with the Taiwanese company and win back some of that custom
(though the firm’s consistently underperforming share price suggests that
investors have their doubts).

Ironically for a hardware business, another big chunk of the cloud-chip

spoils may end up with firms that offer the best software. Nvidia’s popular
programming language, CUDA, already makes it easier for developers to
boost the performance of its chips. For now, the cloud giants seem content to
work with Nvidia rather than try to compete with its specialised software.
But they are first and foremost software firms, so this peaceful co-existence
may not last for ever. All this should worry incumbents like Intel and
Nvidia. For cloud users, it almost certainly means better, cheaper and ever
more invisible services. ■

Read more from Schumpeter, our columnist on global business:

Can Larry Fink survive the ESG culture wars? (Sep 29th)
Is the warehouse business recession-proof? (Sep 22nd)
The rise of the borderless trustbuster (Sep 15th)

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the-chip-wars
Finance & economics

The rumbling draws near

Overmighty
Let them trade bonds
Striking oil producers
China gives up the fight
The rumbling draws near

Financial markets are in trouble. Where will the

cracks appear?
The first big test of a new-look financial system
Oct 4th 2022 | New York

IT IS HARD not to feel a sense of foreboding. As the Federal Reserve has

tightened policy, asset prices have plunged. Stocks, as measured by the
Wilshire 5000 all-cap index, have shed $12trn of market capitalisation since
January. Another $7trn has been wiped off bonds, which have lost 14% of
their value. Some $2trn of crypto market-cap has vanished over the past
year. House prices adjust more slowly, but are falling. Mortgage rates have
hit 7%, up from 3% last year. And this is all in America—one of the world’s
strongest economies.

Rising rates will slow the American economy and should break the back of
inflation. But what else will they break? Since the Federal Reserve raised
rates again on September 22nd, global markets have been in turmoil. When
the British government announced unfunded tax cuts a day later, fire-sales
by pension funds caused the yield on government bonds (or “gilts”) to spiral
out of control. Contagion then spread to the American Treasury market,
which is as volatile and illiquid as it was at the start of covid-19. The cost to
insure against the default of Credit Suisse, a global bank, has risen sharply.
These ructions indicate the world is entering a new phase, in which financial
markets no longer just reflect the pain of adjusting to the new economic
context—pricing in higher rates and lower growth—but now also spread
pain of their own.

The worst pain is felt when financial institutions fail. There are two ways
they do so: illiquidity or insolvency. Tighter monetary policy is likely to
prompt or reveal both. It is illiquidity that comes first—and it has well and
truly arrived. Take the British pension funds. They use a strategy called
“liability-driven investing” to hedge against interest-rate moves. When rates
shot up they faced margin calls, which they met by selling gilts. Yields
moved so fast that this became a fire-sale, with prices spiralling downwards.
The Bank of England had to step in to buy bonds. At least American pension
funds do not treat their liabilities in the same way, meaning they are unlikely
to face similar blow ups.

But pension funds are not the only bond holders that may face liquidity
issues. On October 4th the IMF sounded the alarm about open-ended bonds
funds, which hold $41trn in assets, a quarter of financial assets outside the
banking system. Investors can sell their holdings once a day, “but it may
take fund managers several days to sell assets to meet these redemptions,
especially when financial markets are volatile,” warned the IMF. That
exposes them to moves in market pricing. Outflows are amassing. Investors
have pulled 8% of their assets from these funds this year.

Credit costs are rising quickly, as would be expected in such circumstances.

Betsy Graseck of Morgan Stanley, a bank, highlights how abrupt the shift
has been: “In the most recent senior-loan-officers survey every single
question they asked bankers about financial conditions flipped to tightening,
all at once. I have never seen that before.” Yet the real problem is when
credit is unavailable—no matter the price. British traders report there were
“no bids” for gilts in the days after the government announced its plans.
Measures of liquidity in the Treasury market have deteriorated, too. “We are
seeing what happened in March 2020 again. The same Treasury bonds are
trading at different prices, bid-ask spreads are widening,” says Darrell
Duffie of Stanford University. Strategists at Bank of America describe their
index of credit stress as “borderline critical” .

Stockmarkets have been just as turbulent, but they have at least continued to
function. “You might not have liked the price you were seeing,” says Tal
Cohen of Nasdaq, a stock exchange, “but you were always seeing a price.”
He has yet to witness “demand destruction”, the thinning out of the order
book that occurs when buyers and sellers begin to pull their orders en masse.
This is despite the fact that Bank of America strategists think markets have
fallen to levels at which losses may be forcing funds to sell assets to raise
cash, accelerating the sell-off.

Illiquidity in credit markets is enough of a problem. It can morph into a total

lack of lending. Last week British banks rushed to pull mortgages from their
proverbial shelves. If this dynamic gets out of hand it can typically be solved
by central banks stepping in and operating as a lenders of last resort, as the
Bank of England did. The risk of doing so is not trivial, however. Such an
intervention employs quantitative easing, buying securities using central-
bank money—the path used by central banks to ease monetary policy. Thus
it might undermine faith in central bankers’ commitment to fighting
inflation.

Market-watchers now wonder whether all this pressure will lead to

insolvencies, which happen when the value of an institution’s assets falls
below its liabilities. It is the fate which befell insurers, including AIG, and
banks, including Lehman Brothers, in 2008. Homeowners across America
defaulted on their loans, meaning mortgage-backed securities, assets many
firms had bought, were no longer worth anything close to their original
purchase price. Insolvency is fatal, and only resolvable by bankruptcy or
bail-outs.

The current tension is the first big test of a new-look financial system.
Regulators have sought to make systemically important institutions—as
Lehman Brothers surely would have been designated—too safe to fail. They
have done this by compelling firms designated as such to follow stringent
capital, liquidity and risk-taking rules, as well as by stress-testing them in
hypothetical economic breakdowns. Regulators have also tried to reduce
opacity and counterparty risk—the channels through which fears about
Lehman morphed into suspicion of the entire banking system.

The result is that there are layers of protection around the financial system’s
most important institutions. At the heart of markets are clearing houses,
which settle trades in stocks and derivatives between their members (mostly
big banks). To join a clearing house a member must post an “initial margin”
in case of default; that margin can climb if markets move. The system is
stress-tested against the default of even the clearing houses’ largest
members, such as JPMorgan Chase or Citigroup.

The banks, which stand between the clearing houses and other financial
institutions, are also in better shape. The issues that precipitated the fall of
Lehman Brothers were that the firm did not have enough capital (at times
leading up to its demise it held capital worth just 3% of assets), had taken on
too much borrowing (holding debt worth 30 times its equity), had a dubious
business model (making enormous bets on the American housing market),
and had taken on vast amounts of risk.

Today there are 30 banks designated as systemically important by regulators,

some 28 of which are in the KBW Nasdaq Global Bank Index, which tracks
bank stocks. These 28 banks are funded with capital worth 13% of their risk-
weighted assets (see chart 1), and have debt worth five times their equity.
Despite this, they do not get an entirely clean bill of health: some business
models look fragile. On average the banks returned profits worth 9% of their
equity last quarter, but the worst (other than Credit Suisse) returned just 4%.
It is hard to know whether any have taken huge risks.

“American banks are unequivocally much stronger,” says a bank boss. Few
are making such statements about European banks, and certainly nobody is
about Credit Suisse. The firm had a return on equity of minus 14% last
quarter, its share price has tumbled and its market capitalisation is now just
$12bn. Yet even Credit Suisse is not near a Lehman-style collapse. It is
funded with capital worth 14% of its risk-weighted assets. Although Credit
Suisse credit-default swaps, which act like insurance against default, have
leapt (see chart 2), they still suggest the chance of default is in the low to
mid-single digits.

Big banks head into the new era fortified. But the regulation that has
strengthened their defences has also diminished them. High capital demands
make it hard for them to compete. Because they must add risk weights to all
kinds of assets, they now hold only boring stuff. Leverage ratios constrain
their size. By contrast, financial institutions that are not systemically
important are unencumbered by these rules.
The impact can be seen on balance sheets. In 2010, after the financial crisis,
banks held $115trn of financial assets. Other financial institutions, such as
pension funds, insurers and alternative asset managers, held roughly the
same amount. In the years since, the non-banks’ slice has grown. By the end
of 2020 they held assets worth $227trn, a quarter more than the banks.
Similarly, four-fifths of American mortgages came from banks before the
financial crisis. Today only around half do, and most of these are sold on to
investors.

Thus the dodgy stuff is probably in other institutions. Which ones? In 2007
problems started in real estate. This time Americans have far less mortgage
debt, but the sheer pace of price growth in residential housing suggests some
buyers will face difficulties. Indeed, three-quarters of those who bought in
the past two years regret their decision. Other forms of real estate are also
vulnerable. Firms are downsizing their offices to adapt to working from
home, posing problems for highly leveraged commercial developers. Charles
Bendit of Taconic Partners, a developer in New York, notes that lots have
opted for floating-rate debt, meaning their debt-servicing costs have already
doubled.

Michael Burry, who shot to fame in 2008 after shorting mortgage-backed

securities, is concerned by unsecured consumer finance given the growth of
“buy-now-pay-later” providers and the ease with which consumers have
been able to tap credit-card lines. Goldman Sachs, a bank, ventured into
consumer credit in 2019, helping to launch the Apple card. It now has an
unusually high default rate of 3% over the past six months. Ms Graseck of
Morgan Stanley points out that, because this is an interest rate-shock driven
cycle, trouble will probably first arrive in the loans that reprice to higher
rates quickly: “Floating rate debt, like credit cards, is immediate, then
commercial real estate, autos and eventually mortgages.”

One of the fastest-growing parts of private credit has been that offered to
software-service firms, notes Seth Bernstein, boss of AllianceBernstein, an
asset manager. “These have been fantastic cash machines, because they have
subscription models.” The cash flows they provide have been used to secure
financing, meaning many firms are now highly leveraged. They are also
untested in a downturn. Mr Bernstein compares the situation to the
securitisation of housing debt, in that there is very little information
available about the debt.

It is companies more broadly that appear most at risk. They owe debts worth
80% of GDP, compared with 65% in 2007. A third of American corporate
debt is rated BBB, the lowest investment-grade rating. Firms downgraded
any further are not eligible for many investors’ portfolios. Defaults are now
arriving. Bausch Health, a health-care provider, gave up the ghost on
September 30th, taking the default rate for high-yield issuers to its highest
since June 2020. There is little to no appetite for fresh high-yield debt—
banks that agreed to fund Elon Musk’s Twitter takeover in April will
struggle to issue it without taking losses.

Who holds these bad assets? Financial firms that have grown lots over the
past 15 years are the first place to look. Alternative assets, which include
private equity, real estate and hedge funds, have grown from just 8% of total
financial assets in 2006 to 15% now. They have taken paper losses of 11%
on their investments this year, a much smaller fall than in the public markets.
This might reflect sensible investment—or an unwillingness to adjust to
reality.

Firms that have escaped the full weight of regulation are another place to
look. The Financial Stability and Oversight Council, an outfit established by
the Treasury to watch important financial institutions, tried to claim
oversight of the big insurance companies, including MetLife, AIG and
Prudential. But MetLife won a lawsuit to have the designation overturned,
and the council then rescinded its designations of the rest.

If lots of investors are washed out, as they would be if a non-bank financial

institution failed, well, “who cares?” quips one bank boss. Given reforms
since the last financial crisis, it seems unlikely that there will be failures of
institutions that are so big and important that governments need to bail them
out. The systemic institutions will survive another event like the blow-ups of
the hedge funds LTCM (in 1998) and Archegos (in 2021). But that does not
make life any easier for central banks. It is their job to tighten policy enough
to cool inflation without causing seriously disruptive activity in financial
markets. And it is looking increasingly difficult to do both. ■
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trouble-where-will-the-cracks-appear
US economy

America’s economy is too strong for its own good

Despite market turmoil, the Fed is set on relentless rate rises
Oct 2nd 2022 | Washington, DC

TWO DAYS after the latest interest-rate rise, the seven governors of the
Federal Reserve met with some businessfolk. Any misgivings about the
effects of tighter monetary policy would have been quickly dispelled. Cara
Walton of Harbour Results, a consultancy, spoke of a plastics processor who
hired 14 new employees, only for a mere three to show up on their first day
(and one of those to quit before lunch). Cheetie Kumar, a restaurateur, said
her peers were struggling to make rent as food and labour bills mounted.
Tom Henning of Cash-Wa, a distribution company, explained his firm was
passing costs onto customers. Demand was holding up, he said, thanks to the
amount of money “floating out there in the economy”.

Misgivings may, however, have crept back in as the governors watched the
markets over the past fortnight. The central bank’s goal is to tame inflation,
which is running at more than 8% year on year, just shy of a four-decade
high. The realisation that it is still far from that goal, and that monetary
tightening will thus continue, is causing havoc. American stocks have fallen
for three consecutive quarters, and sharply recently. Bond prices are
tumbling, reflecting tremors in the credit markets. The ratcheting up of rates
in America is driving the dollar’s appreciation, adding to inflationary
pressure elsewhere and impelling other central banks to follow the Fed’s
lead, no matter the state of their economies. On September 30th Lael
Brainard, the Fed’s vice chair, called for her fellow governors to proceed
“deliberately”, a word denoting caution in the central bank’s argot. She also
said the Fed would take its international impact into account.

This was an acknowledgment of the risks of the current approach—it was

not an indication that the central bank is about to change tack. The Fed
simply cannot ignore the strength of the domestic economy. Even with the
financial upheaval, America’s economy is straining at its limits in critical
dimensions. In the labour market there are nearly two jobs available for
every unemployed person. Wages, up roughly 7% compared with a year
earlier, are rising at their fastest pace since the early 1980s, according to the
Atlanta Fed. Although house prices declined month on month in August,
new home sales jumped, confounding expectations. Corporate profits are at
their highest in decades as a share of GDP. Despite higher rates, consumer
confidence has been climbing.
This constitutes a serious challenge for America’s central bankers. The more
resilient the economy, the harder they will have to push to rein in inflation.
There is always a lag between shifts in monetary policy and their impact on
real activity; recent rate rises will inevitably take a toll on the American
economy over the coming year. Yet additional jumbo rate rises remain on the
cards (see chart 1), heightening the risk of a monetary mistake and an
eventual recession. To get a sense of why, despite the brewing trouble, the
Fed is still hawkish, it is crucial to understand why the economy has
remained insulated this far.

Fuel in the tank

The most obvious factor explaining this insulation also explains America’s
inflation: the government was a lot more aggressive than others in
stimulating the economy during the covid-19 pandemic. America’s primary
budget deficit—the difference between government spending and revenues,
excluding interest payments—averaged 10.5% in 2020 and 2021, more than
triple its level before the pandemic and higher than all other big rich
countries.

Formally, this stimulus ended some time ago. The last big short-term fiscal
package was President Joe Biden’s American Rescue Plan (ARP) in March
last year. But in reality, stimulus is still working its way through the system.
Hefty dollops of ARP cash are only just hitting the economy. States were
granted about $200bn in direct emergency funding. In August, they had yet
to draw on a fifth of that. And they are still doling out the funding they have
claimed. In the past couple of weeks alone, Louisville, Kentucky announced
it would spend ARP funds on affordable housing; Monroe Country, New
York directed some of its money to health services; and Cumberland
Country, Tennessee splashed out on water and sewer projects.

Even more important is how the stimulus continues to puff up the balance
sheets of both people and firms. Households sit on about $2trn in excess
savings (relative to their pre-pandemic norm). They are now beginning to eat
into this buffer—savings rates are well down this year. But the reserves have
enabled them to spend at a decent clip even as inflation has eroded their
incomes. It has been a similar story for businesses. At the start of the third
quarter, they had about $2.8trn of cash in hand, down from the start of the
year but about a quarter more than before the pandemic. They have also
taken advantage of robust demand to pass on inflated input costs to
customers, protecting their margins and then some. Post-tax corporate profits
reached 12% of GDP in the second quarter, the highest since at least the
1940s. So long as companies are making profits, they look to hire, not fire,
workers.

Nor has growth been hindered, as it has in Europe, by soaring energy costs
following Russia’s invasion of Ukraine. Indeed, America has, in one sense,
benefited from the invasion. Exports of both crude oil and petroleum
products are at an all-time high. In net terms America has exported about 1m
barrels a day of crude and petroleum products since Russia’s invasion of
Ukraine—all the more remarkable given that America was a net importer to
the tune of 10m barrels a day at the start of the century. The boom in oil-
export earnings has contributed to a narrowing of America’s trade deficit,
which may flatter its growth figures over the rest of this year.

American consumers have been considerably less enthusiastic about higher

prices at the pump. If they compared themselves with their peers in Europe,
they might be more sanguine. Natural-gas prices have historically been a
smidgen higher in Europe than America. These days they are about five
times higher. Europe has been gradually cut off from Russia, its main gas
supplier; America is awash with its own energy. It has only limited
liquefaction capacity, which is needed for exports, meaning the gas it
releases from the ground is mostly consumed domestically. In Europe
monetary tightening is compounded by the negative shock from soaring
energy prices, which is why forecasters expect a deeper recession. In
America the Fed can more or less look beyond the ructions in the energy
markets.

House correction
Sooner or later, continued rate rises will drag on the American economy.
That, after all, is the Fed’s intention. The most rate-sensitive sectors are
already being hit. Rates on 30-year fixed mortgages have reached 7%, the
highest in more than a decade. A steep rise in credit-card balances suggests
that some households are starting to exhaust their savings. Higher interest
rates will only make debts more onerous. Corporate profits also look set to
flag—one reason for the recent stock-market plunge.

Nevertheless, a slow, steady return to normality after covid acts as

something of a buffer against these dangers. Take the property market. The
inventory of homes available for sale remains very low by historical
standards, in part because the supply of building materials, just like other
goods, has been badly constrained over the past few years. A leap in
mortgage rates would usually be expected to lead to a precipitous slowdown
in construction activity. This time, though, builders are still building, trying
to work through the backlog of unfinished homes.

Meanwhile, goods consumption shot up during the pandemic as people

bought new sofas, bigger televisions and fancier exercise bikes for their
homes. Now they are returning to cruises and concerts (see chart 2). This
shift matters for the job market because services tend to be more labour-
intensive. Even if consumers spend less in aggregate, they are spending
more on the kinds of things that require lots of workers, boosting
employment.

Spread over the entire economy, this is a powerful trend. America’s

workforce today is roughly the same size as in 2019. Its composition is,
however, very different. There are 1m more workers in transport and
warehousing, reflecting the rise and rise of online shopping. At the other end
of the spectrum, more than 1m workers have left the leisure and hospitality
sectors over the past three years. According to the National Restaurant
Association, a lobby group, roughly two in three restaurants are
understaffed. Thus the slowdown in growth may lead to a smaller rise in
unemployment than would otherwise have been expected. Companies
suffering from worker shortages have little fat to trim.

In one sense, this resilience is to be welcomed. It implies that a recession, if

one arrives, is likely to be mild. Yet the Fed is determined to get inflation
down, and is focused on wage growth as a proxy for underlying price
pressures. Continued labour-market tightness therefore inclines the central
bank towards a tougher, longer bout of monetary tightening.

The Fed has already raised rates by a full three percentage points this year,
its steepest increase in four decades. As turmoil sweeps through financial
markets, some economists have criticised the central bank for going too far,
too fast. Some Fed officials also seem to be getting cold feet. But their
hawkish colleagues have the upper hand after a year of upside surprises. The
baseline expectation among investors is that the Fed will deliver at least
another percentage point of rate increases before the end of the year. That
may well be a conservative guess. Even after half a year of monetary
tightening and a slowdown in growth, the economy still suffers from a
shortfall of supply and a surfeit of demand—most especially for workers. In
the face of such a mismatch, the only direction for interest rates is up. ■

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strong-for-its-own-good
Buttonwood

The world’s most important financial market is

not fit for purpose
It is beyond time to fix the Treasury market
Oct 6th 2022

EVERYONE WANTS to trade Treasuries. Big banks hold them for liquidity
management, pension funds own them for long-term yields, hedge funds use
them to bet on the economy, individuals’ savings are stored in them and
central banks use them to manage foreign-exchange reserves. The market for
Treasuries, most of the time, is deep and liquid. Some $640bn of
government bonds change hands each day, at prices that become the
benchmark risk-free rate by which all financial instruments are valued and
lending rates set.

So why do they sometimes not change hands? Several times in the recent
past the market has broken down. In 2014 a “flash rally” led to wild swings
in prices, for no clear reason. In 2019 rates spiked in the “repo” market, in
which Treasuries can be swapped for cash overnight. In March 2020
extreme illiquidity led yields to spike, even though in times of panic they
usually fall as investors rush to safe assets. Now issues are cropping up
again: measures of volatility have jumped to levels last seen in 2020 and
bid-ask spreads are widening.

The problem stems from the fact that the Treasury market has doubled in
size over the past decade, even as its infrastructure has shrunk. Trading is
carried out by primary dealers, designated institutions which are mostly big
banks—and regulatory requirements now constrain them. The leverage ratio,
which limits the value of assets banks can hold relative to their capital, does
not care whether the asset is super-safe Treasuries or subprime mortgage
debt. Thus when a client calls asking to sell a bond, banks must find a client
who wants to buy it, rather than holding it as inventory for when another
client calls. In times of stress, this system gets overwhelmed.

The fixes fall into three buckets: let the banks trade more bonds with
investors, let investors trade more bonds with each other, or let investors
trade or swap more bonds with the Federal Reserve.

Start with letting the banks do more. The solution would be to exempt
Treasuries and other safe assets, like bank reserves, from inclusion in
leverage ratios. The Fed and other bank regulators did this for a year from
March 2020 to help ease market chaos. The logic behind the move was
sound enough. Treasuries are not risky assets, likely to default, and so they
do not require much capital to be held against them. Still, the leverage ratio
is appealing because it is simple to administer and cannot be gamed. And
with Democratic bank regulators in charge, who do not want to appear to be
undoing financial regulation, the idea is a non-starter.

How about letting investors deal more with one another? Portfolio managers
at PIMCO, a large bond investment firm, have proposed that investors
should trade on a platform where asset managers, dealers and non-bank
liquidity providers can trade on a “level playing field, with equal access to
information”, akin to how stocks are traded. This could be good, if it is
actually possible. Matching buyers and sellers of Treasuries is harder than
matching buyers and sellers of stocks. All shares in Microsoft are the same;
there are dozens of Treasuries that have roughly five years to maturity.

A final fix would be to let investors do more with the Fed. Last year the
central bank created a standing repo facility, which allows a Treasury to be
swapped overnight for cash. But the facility is only for primary dealers,
which do not always pass on the liquidity. Opening it to more participants
would address this problem. It would also expose the Fed to a range of
riskier counterparties—but that could be mitigated by requiring firms to
swap a greater value in Treasuries than the central bank gives out in cash.

The problem is not a shortage of plausible reforms. It is that none of them

have been implemented. The heady bull market has collided with the reality
of high inflation and much higher interest rates. Financial markets have
already entered a new phase in which volatility, stress and fear have
returned. Any grand plans to overhaul the Treasury market cannot be
implemented on the fly, in the midst of a burgeoning crisis.

If the Treasury market seizes up again—as the market for British

government bonds did after ministers announced a package of unfunded tax
cuts on September 23rd—the task of fixing it will fall on the Fed and its
bond-buying schemes. Relaunching asset purchases at the same time as
raising rates to combat inflation would be very uncomfortable. Since
regulators failed to fix the Treasury market when they had the chance, they
may end up with little choice.■

Read more from Buttonwood, our columnist on financial markets:

Investment banks are sharpening the axe (Sep 29th)
How to rebrand stockmarket indices (Sep 22nd)
Why investors should forget about delayed gratification (Sep 15th)

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markets, sign up to Money Talks, our weekly newsletter.
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important-financial-market-is-not-fit-for-purpose
Striking oil producers

OPEC defies Joe Biden with a big output cut

Will it backfire?
Oct 5th 2022

THE ORGANISATION of the Petroleum Exporting Countries (OPEC) is

sometimes called the oil market’s central bank. Every month the cartel and
its allies, a group of 23 countries that produce 40% of the world’s oil, meet
to decide on production targets. The aim is to keep prices high and stable.
But just as central-bank governors argue about the speed of rate rises,
members of OPEC+, as the wider group is known, disagree on how fast to
turn the spigots.

The summit on October 5th was a short one, but it nevertheless produced a
controversial decision. Ending a series of online meetings and timid tweaks
to output, OPEC+—which includes Russia—met in person for the first time
since the covid-19 pandemic. Emerging from a Viennese boardroom,
ministers confirmed that they would cut production by 2m barrels a day
(b/d), an amount equivalent to 2% of the world’s total output. After months
of market volatility and missed targets, the cartel is determined to restore its
credibility and regain control of the oil price.
Members are worried about falling demand. Brent crude, the global
benchmark, has dropped to $93 a barrel, down from $125 in June. Pricey
petrol has led to lower consumption. Europe’s gas crunch, China’s covid
policies and property troubles, and rising interest rates augur a global
recession. The strong dollar, in which oil prices are denominated, makes the
fuel still less affordable outside America. OPEC+ does not explicitly say so,
but its members want a floor under the price at a time when increased
spending at home implies a higher break-even price. Experts place that floor
at between $80 and $100, compared with $70 to $80 before covid.

The cartel has rarely had such an opportunity to set prices. No country apart
from its biggest members has the capacity to increase output fast, and global
stocks are low. Crude inventories in the OECD, a club of mostly rich
countries, remain well below their five-year average; China is running down
its stockpiles in a bid to satiate its thirsty refiners. The volume of oil on
water may be rising, but that is only thanks to the longer tanker journeys that
are required as the market adjusts to sanctions, rather than growth in floating
storage, notes Giovanni Serio of Vitol, a trader.

The problem OPEC+ faces is that its credibility is in tatters. Even the cut
announced on October 5th is not what it seems. Its members have failed to
invest in production, leading to a gap between target and actual output (see
chart). In reality the cut will apply only to members that are hitting or are
near to their targets. Ehsan Khoman of MUFG, a bank, expects the revision
to deliver a real cut of up to 1.1m b/d.

The tactic is nevertheless working—at least for now. The oil price has risen
by 11% since September 26th, when rumours of the cartel’s plans first
emerged. That makes the reduction worthwhile even for Saudi Arabia,
which will trim its output by 5%, but ought to benefit from an increase in
price twice the size. Jorge León, a former OPEC analyst now at Rystad
Energy, a consultancy, reckons that Brent could surpass $100 by the end of
the year. After the meeting, the Saudi energy minister said that, unless the
market changes, the supply curbs will remain until the end of 2023.

But the decision is not without risk. OPEC+’s market share is yet to recover
from huge cuts it made in 2020 to shore up prices amid a collapse in
demand. Trimming production again may further erode the cartel’s market
share. The cut is also a snub to President Joe Biden, who recently visited
Saudi Arabia in an attempt to cajole it into pumping more, before tough
midterm elections next month. The White House accused the cartel of
“aligning with Russia”, and announced that America would release another
10m barrels from its strategic reserve next month. The decision also
provides fuel to NOPEC, a congressional bill that would allow the cartel to
be sued under antitrust law, although it will have to overcome opposition
from lawmakers and oil firms who fear tit-for-tat measures.

OPEC+’s loss of market share should be partly reversed when it eventually

cranks up output again. Thus it is the decision’s impact on demand, with
higher prices likely to further reduce consumer appetite, that will probably
do more damage to OPEC+’s position. Cutting output in a tight market also
creates more volatility, not less—and the extra uncertainty will discourage
investors and lenders, reducing liquidity in the paper oil markets.

The decision may also reignite diplomatic tensions within the cartel. Since
quotas no longer reflect actual output, the latest cuts are being shouldered by
just a handful of members—Iraq, Kuwait, Saudi Arabia and the UAE—that
were already prevented from producing quite as much as they ideally would.
The UAE, which secured a small increase in July but plans to expand its
production capacity from 4m b/d today to 5m b/d in 2025, will almost
certainly agitate for a rejig in future negotiations. This will be resisted by
underperformers such as Angola and Nigeria, says Robin Mills of Qamar
Energy, another consultancy, in the hope that they can one day rebuild their
capacity.

Ironically, Russia could offer the cartel a solution. The country has long
been a staunch advocate of higher production. But its output is now likely to
fall, both soon, as a result of a European embargo set to start in December,
and in the long run, as sanctions prevent it from getting access to vital
partners, people and parts. Saudi Arabia and the UAE are in bed with “a
weakening business partner”, says Karen Young of Columbia University.
Russia will be reluctant to give away some of its quota. The question is
whether, in a world where it has ever fewer friends, doing so is a price worth
paying to remain inside the tent. ■

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with-a-big-output-cut
Free exchange

Why China’s policymakers are relaxed about a

falling yuan
They have learnt how to walk down stairs
Oct 6th 2022

IN 1988 PAUL KRUGMAN, a Nobel-prizewinning economist, wrote that it

was “fairly likely” the world would soon shift away from freely floating
exchange rates. Governments would instead adopt a system of “broad target
zones”, promising to stop their currencies wandering too far above or below
a fixed exchange rate.

He was wrong—but a version of this future can be seen in China. Each

morning its central bank sets an exchange rate for the yuan known as the
“fix”. China’s currency can float 2% above or below this rate each day. The
zone is narrower than Mr Krugman expected and its mid-point moves each
morning in discrete steps. Yet it is similar enough that economists at
Hamburg University have called it a staircase-shaped “moving Krugman
band system”.
The stairs have been steep of late. Since mid-April, the yuan has declined by
about 10% against the dollar; a decline slowed (but not stopped) by the
morning fix. On its way down, the currency has passed psychologically
important thresholds. In August it crossed 6.8 to the dollar, close to the level
at which the yuan was pegged after the global financial crisis of 2008-09. On
September 26th the central bank set the fix at more than seven yuan to the
dollar for the first time since the early stages of the covid-19 pandemic.

The reason for this descent is clear. America’s Federal Reserve has raised
interest rates aggressively to curb inflation. To stabilise the yuan, China’s
central bank could raise interest rates in tandem. But tighter monetary policy
would be at odds with the needs of its weak economy, which is hampered by
a property slump and draconian covid controls.

What is less clear is where the bottom of the staircase lies, and how sure-
footed the descent will be. Some analysts fear a repeat of 2015, when a
poorly executed devaluation of the yuan provoked capital outflows that
further undermined the currency. But a rerun is unlikely. The yuan is no
longer overvalued. Its target zone is better managed and its capital controls
are better enforced. In the past China kept its currency anchored to the
dollar, because it feared that a conspicuous drop would trigger a run on its
currency. The yuan’s decline against the dollar is now less likely to become
disorderly. For that reason, China will try less hard to prevent it.

In assessing China’s currency choices, economists sometimes invoke the

“impossible trinity”. A country might want exchange-rate stability, monetary
independence and free capital flows, but it can have only two of these. Rich
countries typically make clear-cut choices. As Joshua Aizenman of the
University of Southern California has pointed out, emerging economies are
more ambivalent. Many have adopted mixed positions, embracing none of
the objectives in full, nor rejecting any entirely. By imposing limited
controls on capital, say, they can provide some stability to their exchange
rate, without entirely forgoing monetary independence.

China has clung to exchange-rate stability more than most. The yuan has
been less volatile than India’s rupee, let alone South Africa’s rand or Brazil’s
real. But China has also adopted tighter capital controls, especially since
2015. This can be inefficient and inconvenient. It is, however, not outlawed
by the impossible trinity.

China can also take comfort from the economic fundamentals. Despite its
insulation from market forces, its exchange rate is reasonably well priced.
Adjusted for inflation, it is about 10% below its fair value, according to the
Institute of International Finance. It has remained stable this year against a
broader basket of currencies. If only the fundamentals applied, it ought not
to plummet.

Unfortunately, financial markets are not respectful of such calculations.

“Few will heed fundamentals...in times of turbulence and turmoil,” as Zhou
Xiaochuan, then China’s central-bank governor, put it in 2016. Expectations
of yuan declines can become self-fulfilling, regardless of the underlying
state of the economy.

Mr Krugman showed that target zones, if credible, could ameliorate this

problem, by converting speculators into stabilisers. As the exchange rate
reaches the bottom of the zone, its room for further declines is limited.
Knowing that, speculators would push it back to the middle. The mere
prospect of intervention by the authorities could make actual intervention
unnecessary.

That did not work in China in 2015 partly because of the way its stairs were
built. Each morning’s fix was supposed to reflect the currency’s value at the
end of the previous trading session. Thus any speculative declines during
trading could be embedded in the following morning’s fix. Within any single
day, the zone might constrain the speculators. But from one day to the next,
the speculators could move the zone.

In need of a fix
To restore stability and credibility, China sold more than $700bn of foreign-
exchange reserves in 2015-16 and enforced its capital controls more
zealously. It introduced a mysterious “counter-cyclical factor” in its
calculation of the morning fix, intended to offset any speculative
momentum. It also imposed a reserve requirement on banks that made it
costlier to bet against the yuan. That requirement was removed in 2020, only
to be restored last month.

Having taken these measures, China now seems more confident that the
yuan can fall against the dollar without the fall becoming self-reinforcing.
For this reason, the yuan now seems less anchored to America’s currency.
Economists have looked at how faithfully the yuan mimics movements in
the dollar against other currencies. In the dark days of 2015, it moved one to
one. In recent years, the dollar’s influence has steadily declined, according
to Chen Zhang of the National University of Singapore and colleagues,
falling from one to about 0.3.

China might cling more tightly to the dollar in a period of great financial
stress. But it is otherwise unlikely to intervene heavily to defend any
particular value of the yuan to the dollar. The country’s policymakers do not
mind if the yuan walks steadily down the stairs. Just as long as it does not
tumble. ■

Read more from Free Exchange, our column on economics:

Economists now accept exchange-rate intervention can work (Sep 29th)
China’s rulers seem resigned to a slowing economy (Sep 22nd)
Richer societies mean fewer babies. Right? (Sep 15th)

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are-relaxed-about-a-falling-yuan
Science & technology

To the winners, the spoils

A dose of truth
Tailless comets could threaten Earth
The 2022 Nobel science prizes

This year’s Nobel science laureates have now been

announced
They worked on fossil human DNA, quantum entanglement and “click”
chemistry
Oct 5th 2022

THE FIRST Nobel prize to be announced each year is often referred to as

the “Nobel prize for medicine”. But that is not its real name. It is actually the
prize for physiology or medicine. And this year’s award was firmly on the
physiological side of the divide. The winner—and there was only one, rather
than the usual two or three—was Svante Paabo, a man who has the rare
distinction of having invented an entire scientific discipline,
palaeogenomics, more or less by himself.

Palaeogenomics is the study of the genomes of ancient, often extinct,

biological species. In particular, Dr Paabo concentrated on ancient members
of the genus Homo. His early work, starting in 1985, was on Egyptian
mummies. Mummification in Egypt began about 4,600 years ago—the blink
of an eye in palaeontological terms—and the desert climate of that country is
particularly conducive to the preservation of DNA. So this was a good place
to begin. But gradually, as genetic-sequencing techniques improved, he was
able to push his work backward in time.

His first big breakthrough came in 1997, when he sequenced mitochondrial

DNA from Neanderthals, a human species that lived in Europe and western
Asia, and became extinct about 30,000 years ago. A cell’s mitochondria are
its power packs, extracting energy from glucose and transferring it to a
molecule called ATP, which then drives metabolic reactions. Because they
derive from bacteria that became symbiotic about 2bn years ago with cells
ancestral to animals, plants and so on, mitochondria have their own DNA,
separate from that in a cell’s nucleus. And because there are lots of them in a
cell, whereas there is only one nucleus, their DNA is much more abundant,
and therefore more likely to survive in detectable quantities.

Dr Paabo’s analysis showed that Neanderthal mitochondrial DNA is indeed

different from that of Homo sapiens. This provided, through estimates based
on how quickly such DNA evolves, an estimate (800,000 years ago) of when
the two species diverged. The real prize, however, came in 2009, when he
and his colleagues at the Max Planck Institute for Evolutionary
Anthropology, in Leipzig, Germany, which he helped to found, announced a
sequence of the nuclear DNA of Neanderthals—for technological
improvements meant that the definition of “detectable quantities” had by
then changed. That, together with successor sequences, has permitted the
compilation of a catalogue of genes found in Homo sapiens but not Homo
neanderthalensis. And within that catalogue, presumably, lies the
explanation, not yet elucidated, of what makes Homo sapiens such an
extraordinary species.

The biggest surprise of Dr Paabo’s career, though, was probably the

identification, purely from its DNA, of an entire, new species, Homo
denisova. The original genome of this species was extracted from a finger
bone found in a cave in the Altai mountains of Russia. Denisovans were
related more closely to Neanderthals than to Homo sapiens, and subsequent
analysis has shown that the two sometimes interbred. More relevant from a
present-day perspective is that both also interbred with Homo sapiens when
that African species began turning up in their European and Asiatic
homelands 70,000 years or so ago. The traces are still there, with modern
Europeans having 1-2% of Neanderthal DNA and some people in Asia and
Australasia as much as 6% of Denisovan DNA.

Dr Paabo’s career is, then, a tour de force of scientific detection. And there
is one other thing. Though he spent much of his career in Germany, he is
Swedish. Alfred Nobel’s will specified, “It is my express wish that when
awarding the prizes, no consideration be given to nationality, but that the
prize be awarded to the worthiest person, whether or not they are
Scandinavian.” It was, nevertheless, hard not to notice a slight swelling of
patriotic pride when Thomas Perlmann, secretary of the Karolinska
Institute’s Nobel Assembly, read out the announcement.

A tangled puzzle
The physics prize went to a trio of scientists whose insights into the
fundamentals of quantum mechanics have set the stage for a new era of
technology. Quantum computers, quantum networks and secure quantum
cryptography are all rooted in experiments carried out, over several decades,
by Alain Aspect, John Clauser and Anton Zeilinger.

Their work revolves around a phenomenon called quantum entanglement, in

which pairs of particles become correlated with each other so that they
behave as if they were single units. This leads to counterintuitive effects—
changing the properties of one particle in such an entangled pair will, for
example, immediately change the other, no matter how far apart the particles
are. They could be right next to each other, or at opposite ends of the galaxy.

Albert Einstein—who was no fan of the probabilistic nature of quantum

mechanics—described entanglement as “spooky action at a distance”. He
and others were concerned that it seemed to break the rules of special
relativity, which stipulate that nothing can travel faster than the speed of
light. If entangled particles were separated by a great distance, he argued,
how could information apparently travel between them instantaneously?

In 1935 Einstein and two colleagues, Boris Podolsky and Nathan Rosen,
proposed a thought experiment (subsequently known as the “EPR paradox”)
to probe whether the weird behaviour seen in entanglement implied that
quantum mechanics was not a complete description of reality. Perhaps
particles also carried with them hidden information, not described by
quantum mechanics, about how they might act during experiments or when
they were measured. In 1964 John Stewart Bell, a physicist at CERN, in
Geneva, developed the EPR paradox further and came up with testable
predictions to determine whether or not the hidden variables really existed.

Almost a decade later, John Clauser built the first experiment to test Bell’s
idea. His results agreed with the predictions of quantum mechanics and
showed that Einstein’s hidden variables probably do not exist. The
experiments left a few loopholes, however, which were closed in the early
1980s by Alain Aspect, then a graduate student at Paris-Sud University in
Orsay, France. By fine-tuning and improving on Dr Clauser’s experiments,
Dr Aspect put the final nail in the coffin of Einstein’s hidden variables.

The third physics laureate, Anton Zeilinger of the University of Vienna, has
spent decades looking for ways to put quantum entanglement to use. In 1997
he showed that it was possible to transfer information between particles, a
process called “quantum teleportation”. He also demonstrated that two pairs
of entangled particles can interact in interesting ways. In particular, bringing
together one member of each entangled pair causes the two remaining
particles (which have never been in contact) themselves to become
entangled.

Manipulating the quantum states of systems of entangled particles has

become the basis of technologies such as quantum computing and quantum
encryption. Building on the work of this year’s physics laureates, signals
composed of entangled photons (particles of light) have been sent through
optical fibres several kilometres long and even been transmitted between the
ground and a satellite orbiting hundreds of kilometres above Earth.

“Quantum information science is a vibrant and rapidly developing field,”

said Eva Olsson, a member of the physics-prize awarding committee of
Sweden’s Royal Academy of Science. “It has broad and potential
implications in areas such as secure information transfer, quantum
computing and sensing technology, predictions have opened doors to another
world.”
Speaking after the announcement was made, Dr Zeilinger said that he had
been surprised to receive the academy’s call an hour earlier. “I’m still kind
of shocked,” he said, “but it’s a very positive shock.”

The third of the science prizes, that for chemistry, went to the inventors of a
technique called “click” chemistry. All chemistry is about putting molecules
together and pulling them apart. The details inevitably vary from reaction to
reaction. But there are many areas of the subject where it would be useful to
have a way of snapping the building blocks of large molecules together
regardless of the chemical properties of those smaller units, and that is what
click chemistry does.

Two of the three winners, Morton Meldal of the University of Copenhagen

and Barry Sharpless of Scripps Research, in La Jolla, California (already a
laureate for work on catalysts), invented the underlying trick. The third,
Carolyn Bertozzi of Stanford University, adapted it for use in biological
systems. In both cases, though, it uses a pair of chemical groups—azides (in
which three nitrogen atoms are linked together in a row) and alkynes (in
which two carbon atoms are connected by a triple bond)—that will, in the
right circumstances, react to form a structure called a triazole (a five-
membered ring of two carbons and three nitrogens), while remaining
attached to their original molecules as well. In essence, the azide and the
alkyne are like the two halves of a snap-together buckle.

Click and collect

Before Dr Meldal and Dr Sharpless applied themselves independently to the
matter in 2001 and 2002, the reaction between azides and alkynes was
known to work, but only slowly and with a tendency to yield a mixture of
products. They sought to change that and, after a bit of experimentation,
discovered that copper ions greatly improve both speed and purity. Thus was
click chemistry born. And for purely chemical processes, their approach
worked well. The result has improved drug development, DNA sequencing
and the creation of better materials, to name but three fields.
Bioorthogonal chemisty at work

When chemistry shades into biology, though, there is a problem. Copper

ions are frequently poisonous to biological systems. So Dr Bertozzi decided
to work on a way to make azides and alkynes react without their
involvement. Her solution, which she published in 2004, was to include the
alkyne half of the buckle in a molecule that would put it under strain and
thus make it more reactive. She did this by inserting the triple-bonded
carbon atoms into an eight-member ring. Rings of carbon atoms are most
stable when they have six members. An eight-member ring distorts the
bonds involved, hence the strain.

To solve the particular problem she was interested in, which was to study
carbohydrate polymers called glycans that are often found on the surfaces of
cells, she attached azide groups to sugar molecules of the type that form the
sub-units of glycans and fed the result to her cells. As she hoped, these
modified sugars were incorporated into glycans. She was then able to attach
fluorescent marker molecules to those glycans once they were exposed to
the outside world, by fitting the markers with strained-alkyne rings.

Such molecule-specific fluorescent tagging (see photograph) is still an

important use of bioorthogonal chemistry, as Dr Bertozzi dubbed her
invention, to distinguish it from the copper-based version. It can now be
employed not just to tag molecules, but to follow them around and see how
they interact within a cell. Among other things, that yields a better
understanding of the processes behind individual diseases, and it can also be
used to assist the development of drugs. Click chemistry and its
bioorthogonal offshoot are therefore among the most important chemical
inventions of the 21st century, and their inventors are surely worthy winners
of the prize. ■

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science-laureates-have-now-been-announced
Covid vaccines and menstruation

A study allays fears that covid vaccines harm

menstrual cycles
Those swayed by contrary anti-vaxxer propaganda should take note
Oct 5th 2022

THE EASIEST way to promote a conspiracy theory is to take a grain of

truth and blow it out of sensible proportion. This is exactly how one of the
most pervasive sources of covid-19 vaccine hesitancy—misinformation
about its impact on women’s fertility—spread.

When women of reproductive age started to be vaccinated in large numbers

in the (northern) summer of 2021, some noticed that their periods following
vaccination were later than normal. By September of that year, there were
more than 30,000 reports to Britain’s medicines regulator alone of late
periods following covid vaccines (with the true figure presumably higher,
because of underreporting). Anti-vaxxers then used this phenomenon to
scare women with speculations about long-term damage to their fertility.

Research just published in the BMJ by Alison Edelman of Oregon Health &
Science University in Portland and her colleagues has confirmed both that
the effect is real and that there is probably nothing to worry about. Taking
data from users of Natural Cycles, a menstrual-cycle tracking app, she and
her team found covid vaccination was associated with a small but temporary
increase in cycle length.

Among those who received one dose of vaccine in a menstrual cycle,

periods were on average nearly one day late. Those who received two doses
in a single cycle saw an average of four days’ delay. For both groups, cycle-
lengths returned to normal in the cycle following their second dose,
designated as the “post-vaccine cycle”.

Dr Edelman’s study analysed data provided by 19,622 app-users from

around the world, though most lived in Europe or North America. A quarter
of them, who acted as controls, were unvaccinated. The vaccinated
participants had received a variety of types of vaccine (mRNA, adenovirus
vector or inactivated virus). Vaccine type made no difference to the result.

For a participant to be included, her app had to have collected three cycles of
data before her vaccination as well as the cycles after the first and second
doses of vaccine, and the subsequent post-vaccination cycle. For
unvaccinated participants the requirement was four consecutive cycles.

On average, delays to vaccinated individuals’ periods were within the

normal range—up to eight days. So for most, vaccines did not have a
medically concerning impact. However, the researchers found that 6.2% of
vaccinated participants’ periods immediately after receiving a dose of a
vaccine were more than eight days late. Those experiencing these
abnormally late periods in the post-vaccine cycle tended already to have
longer cycles. There was no evidence that this effect continued after the
post-vaccine cycle, but the trial was not set up specifically to look for that,
so Dr Edelman says, “the group would like to explore that outcome in future
research.”

The world’s covid-19 vaccination programmes do indeed provide a golden

opportunity to analyse how vaccines are researched. At no previous time had
governments across the planet attempted to vaccinate all adults (including all
women of reproductive age) at once.
At the moment, to limit the risk of miscarriage and harm to fetuses during a
vaccine trial, it is standard practice for women of reproductive age
participating in such trials to be using birth control. That is a sensible
precaution, as was the decision to not include pregnant women in specific
formal clinical trials. (Instead America’s Centres for Disease Control and
Prevention conducted real-world trials, into which individual pregnant
women could opt, alongside the main vaccine roll-out.) But this abundance
of caution relating to pregnancy and reducing the risk of harm to fetuses
means that, as in this case, possible side-effects for women of reproductive
age on their menstrual cycles were missed.

Vaccine manufacturers, health regulators and scientists were therefore

caught out when reports of late periods began to emerge as vaccination roll-
outs, which started among the elderly, who were at most risk of dying if they
became infected, reached down the demographic pyramid to women who
had not yet reached menopause. Medical advice struggled to keep up with
the pace of misinformation because reports of late periods as a side-effect
could not have been found in clinical trials.

Without proof that this was a temporary phenomenon, false speculation and
fake news found fertile ground in an often sensitive and emotive issue. Dr
Edelman’s results should go some way towards countering that. ■

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that-covid-vaccines-harm-menstrual-cycles
Manx comets

Tailless comets could threaten Earth

But they also offer an explanation of the solar system’s earliest days
Oct 5th 2022 | London, Ontario

NASA’S DART mission was an impressive success. On September 26th,

using a probe weighing 600kg, it hit Dimorphos, an asteroid 160 metres
across that was, at the time, 11m kilometres away from Earth. The purpose
was to determine whether asteroids which might otherwise strike Earth
could have their paths altered by what is, in effect, a game of cosmic
billiards. Though the results are not yet in, it seems likely that they could.

But that depends on seeing them early enough. Asteroids have predictable
orbits, so cataloguing them is feasible, and is currently being done. This
does not generally apply to comets. Though some (like Halley’s) have
known orbits, most sweep in from the farthest reaches of the solar system,
with little notice of their arrival. And that lack of notice applies, a fortiori, to
a newly discovered class of them that do not flag up their appearance in the
conventional way, by developing a tail.

The first Manx comet, so called after the tailless cats of the Isle of Man, was
spotted in 2014 by a telescope in Hawaii (see photograph). Since then,
several dozen more have been detected. And, as a meeting of the American
Astronomical Society in London, Ontario, heard on October 5th, they are
objects of great interest. The chance—albeit remote—that such a comet
might hit Earth is one reason. Another is that they are a surprising source of
evidence for what happened in the solar system’s earliest days.

Manx comets, like their tail-wagging brethren, come from the Oort cloud.
This is a spherical shell of debris left over from the solar system’s formation
that is way farther from the Sun than the farthest planet, Neptune, and
farther even than the Kuiper belt, a disc-like repository of asteroids and
minor planets, the most famous inhabitant of which is Pluto (see diagram).

The Oort cloud is thought to contain trillions of icy chunks, some of which,
because of a collision or the pull of a passing star, from time to time fall
inward. As these inbound bolides approach the Sun, their ice sublimes, gas
and dust escape, and a comet spreads its tail. A Manx comet, by contrast, is
presumably a solid (and thus ice-free) lump of rock.

A tailed comet on a collision course with Earth might possibly be detected

early enough for a successor to DART, stationed in outer space, to rush in
and push it out of harm’s way. For a Manx comet, the warning time would
be hopelessly short. Yudish Ramanjooloo of the University of Hawaii told
the conference that his models suggest the median time between discovery
and impact would be 30 days, and establishing its orbit sufficiently to be
sure of the risk would shrink that to 18 days.

Another of the reasons for this lack of notice is that, having fallen so far
through the Sun’s gravitational field to get there, Oort-cloud objects are, by
the time they reach the inner solar system, travelling fast. If one hit Earth it
would have an impact velocity of 50-70km per second, about three times
that of a nearby asteroid. And smaller rocks with such velocities (and
therefore presumably of Oort-cloud origin) do enter the atmosphere from
time to time.

One such was observed, as Denis Vida of the University of Western Ontario
told the meeting, by a programme called the Meteorite Observation and
Recovery Project, which watches for meteors over Alberta, in western
Canada.

The object in question weighed about 2kg—too small to reach Earth’s

surface. Instead, it burned up in the atmosphere as a fireball. But its velocity
meant it came closer to the ground than most fireballs of that size, ending its
run at a height of just over 46km, whereas 70-80km is normal. However,
penetration that far into the atmosphere also meant it must have been a lump
of solid rock, rather than the fragile icy conglomerate that standard comets
are made of. A kitten, then, of a Manx comet.

Intrigued, Dr Vida searched the astronomical literature for similar fireballs.

He found two others: one seen in the 1980s by the Albertan instrument’s
predecessor; the second noticed over the Czech Republic in the 1990s. He
then compared the two examples detected over Alberta with the number of
high-speed fireballs seen by the same instruments that disintegrated in the
upper atmosphere, and were thus, presumably, made of cometary material
rather than solid rock. This gave him a rough estimate (about 6%) of the
amount of rocky, as opposed to cometary, material in the steady rain that is
falling from the Oort cloud—and thus of the ratio of rocks to conglomerates
in that cloud.

This figure, which matches what other researchers have concluded is the
proportion of comets which are of the Manx variety, matters to those
interested in the formation of the solar system. They need to explain how
such substantial quantities of solid rock—a substance thought likely to have
formed only near the Sun, since it requires the stuff of the primordial solar
nebula to have been concentrated into large objects, then melted and
differentiated—ended up so far away from its birthplace.

As it happens, this mystery is the inverse of another, which is that there is

less rocky material than expected between the orbits of Earth and Jupiter, the
part of the solar system occupied by Mars and the asteroid belt. One
explanation put forward for this is the “Grand Tack” hypothesis, that a
juvenile Jupiter moved temporarily closer to the Sun, thus disturbing the
asteroid belt and sending much of its contents into the Sun, into outer space
or into the Oort cloud. Manx comets and their kittens suggest this is exactly
what occurred. Just hope that one of those returning exiles does not pay
Earth a visit on its way. ■

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threaten-earth
Culture

The useful “Idiot”

Circles of life
The room where it happened
Rich pickings
A man in full
Out of one, many
Russian literature after the invasion

Yes, the Russian literary canon is tainted by

imperialism
That doesn’t mean you should stop reading it
Oct 6th 2022

FOR MANY in the West, the masterworks of 19th-century Russian authors

such as Fyodor Dostoyevsky and Leo Tolstoy have inspired awe. These
writers often seem to stretch up their hands to heaven, grappling with
universal profundities of faith, power and injustice. The British novelist
D.H. Lawrence, for instance, said that Russian literature explored “the
phenomenal coruscations of the souls of quite commonplace people”. But in
some circles Russia’s invasion of Ukraine has called into question not just
the value of reading these books, but also the morality.

In the Times Literary Supplement, Oksana Zabuzhko, a Ukrainian writer,

argued powerfully that Western readings of major Russian authors had
ignored their imperialist attitudes and indulged their drastic moral relativism
and sympathy for criminals. Literature, she observed, “is of one flesh with
the society for which and about which it writes”. Books are “the camouflage
net” of Russia’s tanks in Ukraine. Meanwhile Volodymyr Yermolenko, a
Ukrainian philosopher, wrote in Foreign Policy that the Russian classics
were “chock-full of imperialist discourse” and “cruelty”.

Proposing a direct link between classic fiction and today’s military

aggression is a stretch. The tomes that helped inspire Vladimir Putin’s
invasion were altogether more esoteric and extreme than “Anna Karenina”
or “The Gambler”. All the same, these critics have a point.

Russia’s best-loved writers are cherished in part for chronicling the country’s
social ills. But unsettling, even dangerous ideas appear in their writing too.
Naturally, the same is true of revered British and American authors, among
others. Yet readers who are sensitive to imperialism and prejudice in
Western works have in the past turned a blind eye to them in Russian
literature. They are less attuned to twisted views of the Ukrainian steppe
than of, say, the American West in the 19th century.

Take the national poet, Alexander Pushkin, whom Russians sometimes refer
to as nashe vse (“our everything”), a moniker that reflects his extraordinary
use of the Russian language and his commitment to championing the “little
man” in the face of tsarist power. Pushkin spent several years in exile
because of the anti-authoritarian spirit of his works, which were appreciated
by the Decembrists, participants in a failed uprising against Nicholas I in
1825.

However, Pushkin also wrote patriotic verse that trumpeted Russia’s

imperial might. Mr Yermolenko cites “To the Slanderers of Russia”, written
in response to the Polish uprising against tsarist rule of 1830-31. The poem
decries supposed European aggression—“Why do you threaten Russia with
curses?”—and proclaims that the country’s enemies will meet their ends
should they venture onto Russian soil. The sentiments echo Mr Putin’s
rhetoric today.

Pushkin’s imperialist bent also shows up in “The Prisoner of the Caucasus”.

The poem describes a young Russian officer who is captured in the
Caucasus before being saved by a Circassian woman. In the epilogue the
narrator celebrates Russia’s violent subjugation of the region and declares
that “everything is subject to the Russian sword”. Here, too, it seems that
Pushkin’s critique of tsarist power does not extend to its imperialism.
Something similar can be said of Dostoyevsky. His books enter the minds of
cerebral murderers and call conventional morality into question. They are
also laced with colonialist ideas.

Egregious examples arise in his “Diary of a Writer”, a genre-bending

collection of fictional and non-fictional sketches produced towards the end
of his life, in which he enthused about the then-ongoing Russian conquest of
Central Asia. In a passage written in January 1881, he celebrates the Russian
army’s victory at Geok-Tepe (now Gokdepe in Turkmenistan), a bloody
battle that cemented the empire’s authority in the region. As Olga Maiorova
of the University of Michigan notes, in the book Dostoyevsky hopes Russia
will continue its conquest into Asia, so that people “all the way to India”
might “become convinced of the invincibility of the white tsar”.

Dostoyevsky’s Russian chauvinism is often expressed in spiritual rather than

militaristic terms. Following his lengthy exile in Siberia during the 1850s—
the result of his association with the Petrashevsky Circle of radical
intellectuals—he became a devout Orthodox Christian. In his thinking, those
who rejected the Orthodox God, such as Catholics or Jews, were anathema.
Dostoyevsky’s long-standing hostility to both crops up in his novel “The
Idiot”. The protagonist, Prince Myshkin, calls Catholicism an “un-Christian”
scourge that Russia must vanquish. “Our Christ”, he avers, “must shine out
as a rebuff to the West.”

The map and the territory

Russia, the author came to believe, was destined to be the vanguard of a
spiritual revolution. It was a messianic force that would vanquish Western
decadence and unite humankind under God. Again, amid Mr Putin’s anti-
Western rants, that sounds nauseatingly familiar. In the past readers have
seen Dostoyevsky as a sublime guide to the darkest, most secret reaches of
the human heart. Today he and other Russian writers can instead seem to
point the way to the front in Donbas.

So while blaming long-dead authors for the depredations of Mr Putin’s army

is unreasonable, some of their work has indeed reflected, even fed, rumbling
pathologies that have erupted into violence once again. But that is not all
these books mean or say.
Consider the work of Tolstoy, for many Russia’s finest novelist, and the
world’s. Yes, it has imperialist blind spots, including in “War and Peace”, his
chronicle of the Napoleonic invasion of Russia in 1812. As Ewa Thompson
of Rice University says, the book neglects the perspectives of the colonised
peoples of eastern Europe, particularly Poles, who often supported Napoleon
against their Russian overlords.

Yet elsewhere Tolstoy repudiates militarism and violence of all kinds. His
exquisite late novella “Hadji Murat” tells the story of a Caucasian warrior
trying to save his family amid a Russian conquest; it sympathises with his
plight and excoriates tsarist aggression. As the mix of patriotism and
pacifism in Tolstoy’s work shows, literature is an inherently ambiguous
medium. Great books can rarely be simplified to a single meaning or moral.
The best expose and anatomise human flaws, whether of character, narrator
or indeed the author.

That is true of Pushkin’s compassionate tales, such as “Eugene Onegin” and

“The Queen of Spades”, and, for all his ugly views, it goes for Dostoyevsky
too. Mikhail Bakhtin, a Russian philosopher, described Dostoyevsky’s
novels as “polyphonic”, meaning that his characters embody distinct, often
clashing ideas. The author’s messianic world-view gets a hearing, but is
often ascribed to scoundrels, low-lifes and fools. In doing so he puts his
ideas to the “strictest test”, says Sarah Young of University College London.
The reader is encouraged less to admire his philosophy than to challenge it.
Ignore Dostoyevsky’s works, and you forgo this invitation.

Those who detest Mr Putin’s invasion of Ukraine need not throw away their
copies of the Russian classics. There is too much beauty and wisdom in
them for that; abjuring them would be a self-inflicted wound. But readers
might revisit them with more critical eyes and a renewed sensitivity to
imperialist sentiments. In the best sense of the term, this is what scholars are
referring to when they talk (as many now do) about “decolonising” the
canon.

That need not mean dismissing influential works on political grounds;

instead it can involve approaching literature from a fresh perspective. It
means acknowledging the troubling parts of books without reducing them to
those aspects alone. It means more reading, not less. ■
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tainted-by-imperialism
Scientific dynasties

Thomas and Julian Huxley were champions of

Darwinism
It was one of many traits they shared, writes Alison Bashford in her
double biography
Oct 6th 2022

The Huxleys. By Alison Bashford. University of Chicago Press; 576 pages;

$30. Published in Britain as “An Intimate History of Evolution”; Allen
Lane; £30

IN 1958 JULIAN HUXLEY fell in love with a gorilla. Then in his early 70s,
he had long been a household name in Britain. As Alison Bashford describes
in her new double biography, Julian had inherited the role of evolution’s
frontman from his grandfather, Thomas Henry Huxley, a Victorian scientist
writer. Yet on meeting Guy the Gorilla at London Zoo, Julian found himself
undone. “Magnificent in his reserve and silent sense,” he wrote of their first
encounter, “he gives you a look of sombre dignity that makes you feel in
some real sense his inferior.”
This fellow-feeling for animals, Ms Bashford notes, was a reversion to
Huxley type. Thomas had started on the road to agnosticism—a term he
coined—in 1860, after his son died in childhood and a tone-deaf curate
presiding over the funeral quoted Paul’s epistles: “If the dead rise not again,
let us eat and drink, for tomorrow we die.” Ridiculous, Thomas thought: as a
zoologist who had observed primates’ treatment of the dead, he doubted that
they believed in resurrection. Nor were they inclined to gluttony. Why
should people be any different?

The sea-tide that would pull him away from religion and towards secular
science was tugging at his heels. It would sweep him to notoriety as
“Darwin’s Bulldog”, arch-debunker of “natural theology” and champion of
the descent of man. The same currents bore his grandson from an abortive
academic career to national and eventually global fame as a broadcaster and
popular-science writer. “A man now cannot be a universal expert,” a
colleague told the young Julian, as a warning against imitating his illustrious
grandfather. The younger Huxley took that as a challenge.

Appropriately for acolytes of Darwinism, Thomas and Julian shared what

may have been heritable traits: scientific genius, an appetite for culture (both
were keen poets), and a tragic tint of mental instability. Thomas was
wracked by depression. Julian’s tempestuous ego troubled his marriage and
tried his friends; his brother committed suicide.

And although Julian lived until 1975—leading UNESCO and the London
Zoo and mentoring David Attenborough—his life, like his grandfather’s,
bore a distinctly Victorian stamp. Both Huxleys tried to instil order in the
chaotic, confusing world around them. At best, that meant understanding it;
at worst, it involved sinister forms of control, as in Julian’s lifelong
enthusiasm for eugenics. Sometimes positive and negative impulses co-
existed. Thomas hailed the end of slavery in America but sneered at racial
equality. Julian denounced Nazi pseudo-science yet advocated the “semi-
compulsory” sterilisation of the disabled almost in the same breath.

Meanwhile, though they spent their professional lives categorising the

natural world, both found themselves obsessed with points at which the
scientific method broke down. Thomas, a renowned rationalist, confessed a
fascination with spiritualism. Julian embraced palmistry and new-age ideals
of cosmic convergence. For all their zealous support of evolution, its
implications haunted both men. They saw the animal lurking inside man.

And the humanity in animals. Influenced by Darwin’s interactions with

orangutans, Thomas hypothesised that the line between apes and people was
etched so thinly that a clever ape could best a dull human. Julian was an
early, vociferous campaigner for endangered animals and a founder of the
modern conservation movement. In Guy the Gorilla, he found a creature he
adored “perhaps more than anyone”, Ms Bashford writes, and a mind he felt
was equal to his own.

Julian longed to communicate with Guy, but never could. The Huxleys
wrote about evolution as a romance, an epic of progress and transformation.
In their own lives and observations they also saw the cruelty of science and
the bleaker aspects of inheritance: the madness, the sorrow, the chained
ape’s pained, silent gaze. Both sides, and both men, are painstakingly
illuminated by Ms Bashford. Balancing scholarly rigour with an eye for the
absurd, her book reveals the human drama behind scientific fact. ■
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champions-of-darwinism
Religion in the modern world

“To Sanctify the World” revisits the Second

Vatican Council
Disputes over the meaning of the momentous gathering are really about
Catholicism’s future
Oct 6th 2022

To Sanctify the World. By George Weigel. Basic Books; 368 pages; $32
and £25

FOR MANY historians of faith, it was the greatest religious gathering of the
20th century, setting a new course for the largest branch of the world’s most
widely followed creed. Starting in 1962, the Second Vatican Council
deliberated in Rome over three years, producing 16 landmark documents on
sensitive topics such as the Catholic view of Judaism and other religions. It
embraced religious freedom and liberal democracy as well as the use in
services of vernacular languages (instead of Latin) and simpler forms of
worship.

Nearly 3,000 bishops from over 100 countries were invited. Such was the
importance of Vatican II, as it is generally called, that Catholics still argue
furiously about it. Each disputatious camp presents its own vision of
Christianity’s future as the correct interpretation of the council.

For liberals, Vatican II was a start, but only that, in dismantling the church’s
authoritarian power structures and becoming more responsive to the
ordinary lives of the world’s Catholics, who now number over 1bn. For
conservative thinkers such as George Weigel, the council was a visionary
effort to prepare the church for a post-Christian world, in which values
rooted in theism would be absent from the corridors of power even in
heartlands of the faith. In his latest book, Mr Weigel—one of the most
confident voices on America’s moderate religious right—insists that the end
of “Christendom” is a reason to be more zealous, not less, in defence of
venerable doctrines and practices.

Since it has little to gain from pandering either to the mighty or to the lazily
liberal majority, Mr Weigel argues, Christianity has no choice but to be
counter-cultural—and conservative. With characteristic fluency, he defends
not only Vatican II but the entire centuries-old process by which bishops,
meeting in council and praying for divine guidance, have wrestled with
subtle doctrinal points and expressed them in complex texts that took
decades to digest fully.

Meanwhile he connects the woes of the 20th century, from the two world
wars to the threat of nuclear annihilation, with the onward march of
technology-driven secularism. The argument is artful but fails to account for
the strange episodes in the current century in which religious figures—from
Russia’s Patriarch Kirill to Iran’s ayatollahs and American evangelists
warning of Armageddon—have shown a distinct fascination with the dark
arts of atomic science. Some religious hotheads see divinity in a mushroom
cloud.

Conservatives such as the author often recall that their heroes, including
popes John Paul II and Benedict XVI, were active participants in Vatican II
who in subsequent years never ceased to invoke the council’s spirit. To their
admirers, both men had a keen sense of secularism’s advance, and of the
need for the church to counter-attack. As early as the 1950s Joseph
Ratzinger—the future Benedict—understood that Catholicism in
superficially pious Bavaria, his homeland, was little more than a hollowed-
out shell.

For their part, supporters of Francis, the current pontiff, praise his revival of
the progressive spirit of Pope John XXIII, who launched the council at the
end of a life chastened by service as a roving diplomat. In the 1960s, it
seemed radical to devolve power from the papacy to bishops; Francis has
invited representatives of indigenous people in Latin America, including
women, to sit alongside the robed prelates as they ponder the future of
Catholicism, and indeed the planet. For conservative thinkers, Francis’s offer
to “accompany” individuals who lead unconventional marital or sexual lives
goes beyond Vatican II, which was really, in their view, a call to arms in
defence of core beliefs.

In today’s information-overloaded age, it can seem odd that people should

still be arguing over the minutiae of arcane documents issued 60 years ago
(which in turn rested their authority on events that unfolded almost 2,000
years before that). A rough corollary in the modern era may be Communist
Party congresses in the Soviet Union, which also aspired to chart the future
by teasing out the real meaning of old axioms. Mikhail Gorbachev’s
generation of reformers claimed to be “children of the 20th congress” of
1956, at which Stalin was denounced. By 1990, when the party held the last
of its solemn gatherings, it was obvious that communism itself, not merely
its “wrong interpretation”, was dying.

For all its woes, not least the rolling child-abuse scandals, Catholicism is not
about to expire. But for anyone observing its internal debates, it is hard to
resist the feeling that both the main camps—doctrinal conservatives such as
Mr Weigel and liberal experimenters of the pro-Francis faction—are behind
the curve of history, despite their best efforts to keep up. ■
This article was downloaded by calibre from https://www.economist.com/culture/2022/10/06/to-sanctify-the-world-revisits-the-
second-vatican-council
American music
A new book explores the hidden history of the
banjo
It was created by enslaved Africans, Kristina Gaddy explains in “Well of
Souls”
Oct 6th 2022

Well of Souls. By Kristina Gaddy. W.W. Norton; 304 pages; $30 and £22

NEAR THE beginning of “Deliverance”, a horror film of 1972 about four

men from Atlanta who go canoeing in the backwoods of north Georgia, one
of the city types takes a guitar from his car and trades melodies with a dead-
eyed boy on a porch, who strums a banjo. The locals and visitors smile and
dance, but things soon turn sour. What follows helped convince a generation
of urbanites to holiday at the beach. It also solidified the banjo’s image as a
totem of white rural culture.

Kristina Gaddy’s beguiling new book aims to subvert that reputation by

excavating the banjo’s history. Her thesis is simple and well-supported. The
banjo was created in America by enslaved Africans, and for much of its
history was integral to African-American culture, celebration, spirituality
and resistance.
She weaves her story together from sources including paintings, diaries and
letters, and tells it chronologically. In a less daring writer’s hands, this might
have become a slog, but Ms Gaddy successfully blends archival skills with
imagination. The opening, for instance, describes an engraving of a “strum
strump”—a sort of ur-banjo made from a hollowed gourd covered in animal
hide—found in Jamaica in the 17th century. Ms Gaddy goes on to evoke the
island as it was then and the music the instrument would have made.

Her narrative moves across the Americas, following enslaved Africans, their
descendants and their instruments. Strum strumps become banzas, banjas
and banjers. For most of its history, many people looked down on the banjo.
James Hollyday, a landowner in Maryland, sent a “bangeau” to his niece in
London in 1758; she thought the artefact was “a great curiosity” on which
she hoped to make “pretty music”. Hollyday himself associated it with the
enslaved people who played it. He “should not have thought of sending so
rude an instrument of music”, he said, had his wife not wanted him to.

Ms Gaddy depicts the ways the enslaved used these instruments in dances
and other forms of celebration that were tolerated reluctantly, if at all, by
white authorities, who feared rebellion and secret communication through
music. The banjo was “sacred”, she writes; “it fit into a cultural complex of
music, dance and spirituality.” This part of her narrative is slightly over-
egged. Banjos were used in dances and celebration, which often had a
spiritual component, but it does not follow that they were wholly sacred
rather than secular.

The most heartening aspect of this book is the most contemporary. The last
chapter discusses African-American musicians rediscovering the banjo and
reclaiming their rightful place in Appalachian, country and old-time music
—“white” genres that adopted the banjo, so contributing, over the centuries,
to the erasure of its origins. The Carolina Chocolate Drops, an African-
American old-time string band whose founder, Rhiannon Giddens, wrote the
book’s foreword, won a Grammy. Others will follow the trail they have
blazed, and American music and culture will be richer for it, and more
whole. ■
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of-the-banjo
British fiction

William Boyd’s new novel is a rollicking tale of

adventure
“The Romantic” is both a vivid portrait of a life and a sweeping panorama
of the 19th century
Oct 6th 2022

The Romantic. By William Boyd. Viking; 464 pages; £20

WILLIAM BOYD’S extensive back catalogue includes several “whole-life”

stories, as he calls them, of which the best-known is “Any Human Heart”
(published in 2002). His 17th and latest novel is another cradle-to-grave
epic. In “The Romantic”, a flawed yet captivating protagonist again makes
his way through the world, interacting with both factual and fictional figures
and weathering personal tribulations and historical upheavals.

This time around, the hero’s life arcs across the 19th century. Cashel
Greville Ross is born in 1799, orphaned and brought up in County Cork by
his aunt—or so he is led to believe. When he learns the truth of his origins
he enlists as a soldier, narrowly escaping the battle of Waterloo with his life.
Later, as an officer in the colonial Madras Army, his morality is tested when
an engagement with restless locals in Ceylon turns into a massacre.

Back in civilian life, Cashel begins touring Europe with a view to writing a
travel book. In Pisa he befriends the Romantic poets, going shooting with
Byron (“a warrior without an enemy”) and sailing with Shelley. In Ravenna
he embarks on an all-consuming love affair with Raphaella, a married
contessa, until a secret from her past comes to light. And in London, he
enjoys literary fame—until he is swindled by his publisher and sent to a
debtors’ prison.

Again and again, Cashel’s streaks of luck or contentment are jeopardised by

cruel twists of fate. His expedition to discover the source of the Nile results
in a rival stealing his glory. A late-career stint as a diplomat in Trieste comes
to a shocking end when he realises he has been made an unwitting
middleman in a smuggling racket. Cashel devises plans to get even with
those who double-crossed him. Eventually, though, his determination to
settle scores is supplanted by a yearning to track down Raphaella after
decades of separation. But is seeing out his days with her “the coda that his
life was waiting for?”

Not every stage of Cashel’s life is equally engaging. But most are packed
with passion, adventure, suspense, comic interludes and a range of colourful
characters. The war scenes are visceral (“lancers were shredded, as if they
were carrots in a grater or turnips in a cutter”), and a sense of urgency
powers Cashel’s mission to win back his lost love. The rollicking work of a
masterful storyteller, “The Romantic” is both a vivid portrait of a life and a
sweeping panorama of an age. ■
This article was downloaded by calibre from https://www.economist.com/culture/2022/10/06/william-boyds-new-novel-is-a-
rollicking-tale-of-adventure
Johnson

Switzerland is a model of a multilingual state

But it is not an easy one to imitate
Oct 6th 2022

EUROPE IS THE home of the idea that people who see themselves as a
nation should have a country. And very often those countries have seen
themselves linguistically: France is the home of those who speak French,
and so on. This has always been a simplification. But one state, one nation
and one language remains a Platonic ideal.

Which makes it all the odder that, at the heart of Europe, one nation in one
state is one of the most happily, successfully multilingual places on Earth.
Switzerland, which has a population comparable in size to Hungary’s or
Austria’s, has four official languages, and a huge amount of local variety
beyond that.

About 60% of Swiss speak German as their mother tongue; but if you
studied the language of Goethe in Hamburg or Hanover, good luck
understanding a conversation among Swiss. The local “Schwyzerdütsch” is
so far from the standard that children who speak it have to learn High
German in school. But the Swiss are proud of their German, which can even
be starkly different from valley to valley. A German executive in Geneva
says that when visiting Zurich, he often finds it more practical to speak
English.

Just over 20% of Swiss speak French, the next-biggest language. Then there
is Italian, spoken by only about 8% of the population, and, most remarkably,
Romansh, a Romance language that is the native tongue of only around
0.5% of Swiss. Yet all three, alongside German, are official languages in the
country. The Italian spoken is often a local variety, and even tiny Romansh
has widely diverging dialects. One Romansh-speaker says that, when he was
in the army, it was easier for him to use German with Romansh-speaking
comrades than what was notionally their common language.

How can a country so linguistically diverse work, and indeed be one of the
richest in the world? François Grin of the University of Geneva says that it is
because of a national myth, whereby “Switzerland functions not despite but
because of its multilingualism.” The point of the myth, he says, is not that it
is true (or false), but that it is useful. The Swiss work hard at keeping it
going.

Traditionally, Swiss students studied the next-biggest national language after

their own as their first foreign one. Italian-speakers often learn both German
and French (and Romansh-speakers, the lot). And English is taught in all
schools, as well as being heard frequently in the streets of the most
international cities, Geneva and Zurich. Switzerland is also generous to the
many who speak yet another language; Geneva makes its schools available
for the teaching of Portuguese after hours to the large Portuguese-descended
population, for example. The children of immigrants typically master the
local dominant language, even Swiss-German, which is not formally taught.

But this doesn’t make every Swiss a polyglot paragon. The key to
Switzerland’s functioning is its principle of territoriality: in most of the 26
cantons, one language rules. (Three cantons are bilingual in German and
French, and Graubünden is trilingual in Italian, Romansh and German.) This
territoriality can be coercive—Swiss courts have found that cantons may
forbid students to be primarily educated in another national language even in
private schools. The principle’s strength means that some Swiss who have
not lived outside their home region may never fully master another national
language.

And in recent decades, many of the German-speaking cantons, following

Zurich, have shaken the Swiss model by introducing English before French
as the first foreign language learned in schools. Since even the Swiss do not
easily manage three or four languages (remembering that Swiss German and
High German are quite distinct), this means that many in German-speaking
Switzerland do not master French if they focus on English.

But even if every individual Swiss is not a walking interpreter’s booth, the
country remains deeply committed to its multilingual model. It is not an easy
one to copy: Switzerland is the product of fiercely independent cantons
joining the confederation for mutual benefit while still considering
themselves sovereign. The country must respect localism, or it would not
exist.

That said, most European states are amalgamations of what were once
smaller units too. Often their founding stories are that they were destined to
be united, including by language. They could learn from Switzerland, whose
national story holds that unity and uniformity are not the same thing.■

Read more from Johnson, our columnist on language:

Translating royal names is a relic of European history (Sep 22nd)
The struggle to preserve regional languages (Aug 25th)
Should “data” be singular or plural? (Aug 11th)
This article was downloaded by calibre from https://www.economist.com/culture/2022/10/06/switzerland-is-a-model-of-a-
multilingual-state
Economic & financial indicators

Economic data, commodities and markets

Indicators

Economic data, commodities and markets

Oct 6th 2022
This article was downloaded by calibre from https://www.economist.com/economic-and-financial-indicators/2022/10/06/economic-
data-commodities-and-markets
Graphic detail

Steady as she goes

Steady as she goes

Since 1310 bond yields have fallen with

metronomic regularity
They are projected to drop below zero for good in 2066
Oct 6th 2022

FROM 2015 to 2021 long-term interest rates sat at record lows. On average,
during this period ten-year government bonds yielded 1.9% in America,
1.1% in Britain and zero in Germany. But just as investors got used to
vanishingly low rates, those rates vanished. In 2022 America’s yields have
risen from 1.5% to 3.8%, Britain’s from 1.0% to 4.1% and Germany’s from
-0.2% to 2.0%.

Such abrupt surges have raised fears of an imminent recession, and caused
asset prices to plunge. Nonetheless, increases in long-term yields are likely
to be temporary.

With apologies to homeowners with variable-rate mortgages, many

borrowers have done well in 2022 because prices have risen faster than
expected, inflating away some of their debts. Even after their recent rise,
current ten-year government bond yields lag inflation over the past 12
months by five percentage points in America and a whopping ten points in
the Netherlands.

This gap reflects investors’ expectation that inflation is likely to subside

fairly soon. But recent research on long-run trends in interest rates suggests
that creditors hoping for healthy real yields in future are still likely to be
disappointed.

In 2020 Paul Schmelzing, an economist, published a dataset of interest rates

and inflation dating back to the 1300s, in countries representing four-fifths
of advanced-economy GDP. It showed that real long-term yields fell from
the low double digits in the early Renaissance to the low single digits today.
The trend applied to both public- and private-sector debt, and to seven of
eight countries studied (the exception was Spain, where rates averaged 27%
following Napoleon’s defeat in 1814).

Last month Mr Schmelzing, along with Kenneth Rogoff of Harvard and

Barbara Rossi of Pompeu Fabra University, released a working paper that
tried to identify key points in history when the path of interest rates changed.
Surprisingly, GDP-weighted real rates followed nearly a straight-line long-
term trajectory during the entire period, falling by an average of 0.016
percentage points per year. The only two events that appeared to disrupt the
trend were the Black Death and a wave of sovereign-debt defaults in the late
1550s. All other deviations—including those following the founding of
America’s Federal Reserve in 1913 and the advent of inflation-targeting
central banks—could not be distinguished statistically from random chance.

This trend may be of little use to speculators, as rates have drifted towards
its level only over long periods. It underestimated real borrowing costs by
two percentage points on average from 1363-1479, and then overestimated
them by one point from 1480-1625. Nonetheless, people investing on behalf
of their grandchildren should take note: the 700-year pattern suggests that
current real rates should be just 0.7%.

The authors speculate that the trend may be more likely to flatten out as rates
approach negative territory than to continue for ever. However, they “do not
see evidence of that yet”. A simple linear extrapolation implies that on
average, real rates will sink below zero for good in 2066.

Chart sources: “Eight centuries of global real rates, R-G, and the
‘suprasecular’ decline, 1311-2018”, Paul Schmelzing, 2020; Refinitiv
Datastream; World Bank
This article was downloaded by calibre from https://www.economist.com/graphic-detail/2022/10/06/since-1310-bond-yields-have-
fallen-with-metronomic-regularity
The Economist explains

What is annexation?
Why fracking cannot solve Europe’s energy crisis
The Economist explains

What is annexation?
Vladimir Putin is staking a false claim to sovereign Ukrainian territory
Sep 30th 2022

ON SEPTEMBER 30TH Vladimir Putin signed documents to annex four

partially occupied Ukrainian provinces—Kherson, Zaporizhia, Donetsk and
Luhansk. Sham referendums had been conducted at gunpoint there, with
little pretence of legitimacy. According to the Kremlin, in each province at
least 87% of voters (and a preposterous 99% in Donetsk) voted for the land
where they lived to become part of Russia. In his speech Mr Putin did not
use the word “annex”, but he did claim that the territory (some 17% of
Ukraine) would be “our citizens forever”. In reality Russia has no right to
this territory. Its claim to Crimea, a strategic peninsula it occupied in 2014,
is similarly bogus. But in both cases Mr Putin has presented the illegal act as
reunification, not annexation. What is annexation, and why is it important to
use the word?

Under international law, annexation is when one country forcibly asserts

control and sovereignty over another country’s territory. This usually follows
military occupation. Annexation is unilateral. Territorial control is declared
by the occupying power; the other party gets no say. (If a territory gives up
control to another, that is called cession.) Russia claims that the four
Ukrainian territories it is annexing have acceded to Russian control, as
demonstrated by the results of the sham referendums. In Russia this is
presented as the correction of a historical wrong. Mr Putin has claimed on
multiple occasions that Russians and Ukranians are one people with a
common heritage dating back to the time of Kyivan Rus, a medieval
political federation covering present-day Belarus, Ukraine and part of
Russia. It is an empty justification for a war of imperial conquest.

Since 1945 very few leaders have conquered and annexed whole countries.
(Saddam Hussein’s invasion of Kuwait in 1990 was a rare exception, and
was swiftly reversed.) However, a larger number have expanded their
borders by annexing small portions of territory belonging to others. An
annexation is legitimised when it is recognised by other countries and by
international bodies such as the United Nations and the International
Monetary Fund. India justified its annexation of Goa in 1961 as the return of
historically Indian territory from Portuguese colonial rule, and the UN
recognised India’s claims almost immediately.

By contrast the annexations of the Syrian Golan Heights by Israel in 1981

and of Western Sahara by Morocco in 1976 and 1979 remain unrecognised
and are considered illegal occupations. Similarly, the United Nations
General Assembly does not recognise Russia’s claim to Crimea. America’s
president, Joe Biden, has already said that his country will “never, never,
never” recognise this latest annexation.

That won’t deter Mr Putin. He has said that Russia refuses to live under the
West’s “false rules”. Instead, he is making up his own. Having annexed parts
of Ukraine, he may spuriously claim that when Russian forces fight
Ukrainians on Ukrainian soil, they are in fact defending Russian territory.
That same tactic could be used elsewhere in future: Russian troops already
occupy parts of Georgia and Moldova. ■

More from The Economist explains:

How does underwater sabotage work?
Who is Yevgeny Prigozhin, the man behind the Wagner Group?
Why the capture of a Russian T-90M tank matters
This article was downloaded by calibre from https://www.economist.com/the-economist-explains/2022/09/30/what-is-annexation
The Economist explains

Why fracking cannot solve Europe’s energy crisis

Exploiting the continent’s gas reserves would be harder than it has been in
America
Oct 4th 2022

EUROPE IS GRIPPED by an energy crisis. Last year the EU imported 83%

of its gas. Since then its main supplier, Russia (which provided around 40%
of those imports) has slashed deliveries. Britain produces half of the gas it
uses, but it is also feeling the squeeze. This leaves the continent with an
urgent need either to use less gas or to find more of it elsewhere. Some—
including Britain’s new prime minister, Liz Truss—think hydraulic
fracturing, or “fracking”, could be a big part of the answer. This method of
extracting oil and gas has been hugely successful in America. Could it help
Europe ramp up its energy production too?

America’s example looks like a reason for optimism. Its oil-and-gas

companies developed fracking in the 1940s as a means to improve the flow
in wells. The process uses water, sand and thickening agents to blast gas out
of porous rock formations, known as shale, deep underground. Over the past
decade the widespread application of fracking has transformed America’s
energy industry. Most of the 950bn cubic metres (bcm) of gas America
produces each year comes from fracking.

But European countries would struggle to produce anything like that. First,
they have much smaller shale-gas reserves. The largest were thought to be in
Poland and France, with around 4,000bcm each. But after further
exploration Polish experts have cut estimates of their country’s recoverable,
economically viable reserves to between 190bcm and 260bcm. At current
consumption rates, that might be enough to meet Polish demand for a
decade. France, which banned fracking in 2011, has hardly explored its
reserves. Though its government estimated in 2015 that between 540bcm
and 1,900bcm could be extracted over three decades, it is unclear whether
this could be done profitably. Germany’s gas lobby says it could produce
10bcm a year—a far cry from the 800bcm in total reserves that the
government’s geological institute had recently estimated. In Britain, total
shale-gas production could be just 90-330bcm, according to a recent report.

Second, there are economic and political impediments. America’s shale-gas

revolution was facilitated by the country’s relatively low population density,
a helpful legal and regulatory environment and well-developed energy
infrastructure and supply chains. The situation in Europe is very different. Its
population density is much higher, and local opposition to shale-gas wells is
likely to be more intense. That is partly because of environmental concerns,
which are more vocal in Europe. Fracking can lead to methane leakage and
groundwater pollution, as well as carbon emissions. Furthermore, in Britain
and most other European countries, underground mineral rights are owned
by the government and not, as in America, by the local landowner. European
landowners therefore do not stand to benefit directly from a fracking boom,
as Americans have.
Such factors explain why in Europe fracking has few friends and many
enemies. Despite the enthusiasm of Ms Truss and many Conservative Party
voters, most British people are against it (see chart). In France, no major
political party wants to reverse the fracking ban. German lawmakers have
made fracking almost impossible—and there is no serious political interest
in revisiting the issue. Moreover, even if such obstacles could be overcome,
progress would still be hard. European countries lack the deep industrial
base, including drilling companies and pipelines, that enabled the American
boom.

To produce significant amounts of European gas by fracking would probably

take at least three years. Maybe it would be worth pursuing. But on its own,
it is no answer to Europe’s current crisis. ■

More from The Economist explains:

How does underwater sabotage work?
How the EU intends to collect “windfall profits” from energy firms
How revolutionary is California’s ban on petrol-powered cars?
This article was downloaded by calibre from https://www.economist.com/the-economist-explains/2022/10/04/why-fracking-cannot-
solve-europes-energy-crisis
Obituary

God’s smuggler
God’s smuggler

Brother Andrew secretly carried Bibles behind the

Iron Curtain
Andrew van der Bijl, a Dutch Christian missionary known as Brother
Andrew, died on September 27th, aged 94
Oct 6th 2022

IT WOULD START with a contact from a trusted source. A discreet

introduction. Then a seemingly random encounter, perhaps in the street.
Only once safely indoors, and out of sight, would Brother Andrew hand over
the box he’d brought with him. His contacts choked back tears when they
saw what was inside. “You know, years ago I knew that people in the West
were praying for us,” a Romanian Christian once told him. “But now for
many years we have not heard from them. We’ve never been able to write
letters, and it’s 13 years since we received one. It has come to us that we are
forgotten, that nobody is thinking of us, nobody knows our need, nobody
prays.” As soon as he got home, he promised, he would tell so many people
about the little Christian community in Romania (or Bulgaria, or Poland, or
Russia—wherever he happened to be) that never again would they feel
alone.
Early on, he learned about putting a hand up to volunteer for a job or
stretching one out to a fellow human being. His father was up at five
watering the garden to help feed his six children. Then he cycled four miles
to his smithing job. His invalid mother sat in her chair at home, listening to
the gospel station from Amsterdam. Sometimes it was hymns, sometimes
preaching. The family was poor, even by the standards of the poor in pre-
war Holland. Their house was the smallest in the village. But he never forgot
the unending stream of beggars, itinerant preachers and gypsies who came to
their door. In his autobiography, he recalled how “the cheese would be sliced
thinner, the soup stretched with water”. Sometimes they had to dig up tulip
bulbs from the garden and eat them like potatoes. But no guest was turned
away.

He’d never intended to be a smuggler—for God, or for anyone else. But

rebellion was another seed that was sown young. He was just 12 when war
came to Holland in 1940. A German lieutenant took over the burgomaster’s
house and began giving orders to the villagers. In the middle of the night the
boy would creep down from the loft, steal his mother’s precious rationed
sugar and pour it into the German soldier’s petrol tank. She never said a
word.

The first communist country he visited was Poland. They called it socialism
there, not communism. On hearing there was to be a big festival in Warsaw,
he wrote to the organisers suggesting they might teach him about socialism
if he could tell them about God. You can do what you want to, they said. So
in July 1955 he set off across Europe by train. In his bag were hundreds of
tracts entitled “The Way of Salvation”, which he intended to give away.

Religion, he learned, wasn’t banned under communism; it had been co-opted

by the state. In Czechoslovakia ministers had to renew their licences every
two months, and submit their sermons in advance for official approval.
Where they could not beat God, the authorities tried to outshine His appeal.
In East Germany they offered free “Welcoming Services” instead of
baptism. Or wedding services that were legal and free of charge. Those who
saw God as the higher authority were told they were misguided. Many lost
their jobs and were imprisoned. Children wore a red scarf as a sign that they
were sceptical of their parents’ so-called religious superstitions. Seeing the
mass of red scarves at the end of the festival in Warsaw, he thought of a
verse from the Book of Revelation. “Be watchful, and strengthen the things
which remain,” it said. Persecuted Christians in communist countries would
otherwise die. He took it as a sign from God.

And so began his new life. The day his visa to Yugoslavia came through, a
neighbour gave him his Volkswagen Beetle. “My wife and I have talked it
over,” the neighbour said. “And there’s no untalking us.” Friends he stayed
with in Berlin were enthralled at the idea of taking Bibles to the Soviet
Union, he recalled. Their church had some Russian Bibles. Couldn’t he take
them along? He wasn’t so sure. Their car was already weighed down. Then
some other friends came with a whole carton of Ukrainian Bibles. “Of
course we’ll take them,” his fellow smuggler said, stowing them openly on
his lap. “If we’re going to be arrested for carrying in Bibles, we might as
well be arrested for carrying in a lot of them.”

He learned to get around those who tried to lay down the law. Filling in visa
forms, he put his occupation down as teacher rather than missionary. He
stressed that he was not preaching, but bringing greetings from Holland.
And at every border, he whispered the smuggler’s prayer. “When you were
on Earth, you made blind men see. Now, I pray, make seeing eyes blind.”

He never ceased to be amazed by those he met. The people in Macedonia

who were too scared to come to church unless it was dark, but come they
did. The people in Bulgaria who would arrive at intervals so that at no time
did it appear as if a group was gathering. It took an hour for 12 of them to
assemble. A man named Petroff who spent all his pension buying up cheap
Bibles whenever he found them. Pages were often missing; they’d been cut
out for cigarette paper. But Petroff made them whole, matching a Book of
Genesis to a Bible that did not have one. All to give the finished work to a
church that had no Bible.

The courage and common humanity of those he met would have touched
anyone, not just the faithful. He knew he could stop at any moment, and
return to a quiet life in Holland. But he kept on carrying Bibles across
borders—to Cuba, where Dutch visitors did not need a visa. To Uganda, and
then across the Middle East. Soon the task was too big for one man and he
founded Open Doors, a charity, to train a new generation of smugglers. In
1981 he organised Project Pearl, unloading a million smuggled Bibles onto a
beach just south of Shantou City to be sent across China.

A living church
A missionary church was a living church, he believed. A sticker on his
battered suitcase read: “Our God is not dead. Sorry about yours”. He wished
there were ten of him. He longed to split himself into a dozen parts and
answer every call that came. Some day, he’d find a way to do it. And he did.
■
This article was downloaded by calibre from https://www.economist.com/obituary/2022/10/06/brother-andrew-secretly-carried-
bibles-behind-the-iron-curtain
 Table of Contents
TheEconomist.2022.10.08 [Fri, 07 Oct 2022]
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