Speech March 31, 2023 The U.S. Economic Outlook and Monetary Policy Governor Lisa D. Cook At the 2023 Midwest Economics Association 87th Annual Meeting, Cleveland, Ohio

Speech  March 31, 2023

The U.S. Economic Outlook and Monetary Policy

Governor Lisa D. Cook

At the 2023 Midwest Economics Association 87th Annual Meeting, Cleveland, Ohio

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Thanks to President Kasey Buckles and the program committee for affording me the opportunity to give the C. Woody Thompson Memorial Lecture. It is a pleasure to be back in the Midwest. Before joining the Federal Reserve, I taught economics at Michigan State University, which I chose for its bird's-eye view of the industrial Midwest. Big 10 rivalries aside, Ohio and Michigan share quite a lot, including many of the same economic concerns and interests.

Today I would like to outline my views on the trajectory of U.S. economic developments and what they imply for the appropriate path of monetary policy.1

This is an especially challenging time to be an economic analyst or policymaker. Recent developments in the banking sector have added to existing uncertainties about recovery from the pandemic shock and developments abroad. In that context, the economic and policy outlook needs to balance data dependence with forward-looking analysis. Recent data show greater momentum in inflation and economic activity, but recent banking developments may suggest greater headwinds for financial conditions and the economy going forward.

The U.S. economy

Assessing the current state of the economy requires revisiting the pandemic and its economic repercussions. From the perspective of the NBER Business Cycle Dating Committee, the 2020 recession was unprecedented. Of the 35 recessions since 1858, only 8 spanned months in the single digits from peak to trough. The one in 2020 was severe, but it spanned only two months from peak to trough and was the shortest recession on record.

However, the pandemic's economic effects reverberated through 2021 and 2022. Inflation surged during the recovery amid pandemic-induced disruptions to supply, while demand for goods was boosted by a shift away from in-person services, and overall demand was supported by monetary and fiscal policy. Russia's invasion of Ukraine in February 2022 was a further supply shock to the global economy, driving up prices for energy and other commodities. Last June, U.S. inflation hit a peak of 7 percent as measured by the 12-month change in the personal consumption expenditures (PCE) index.

In response, the Federal Reserve has been using its monetary policy tools to restore price stability by bringing demand into line with still-constrained supply. Over the past year, we have raised the federal funds rate nearly 5 percentage points and have begun to reduce the size of our balance sheet.

As a result, financial conditions have tightened significantly. Borrowing costs have risen, equity prices have declined, and the dollar has appreciated on net.

Interest-sensitive sectors of the economy have slowed. Residential investment subtracted nearly 1 percentage point from gross domestic product growth last year, as housing demand was curtailed by higher mortgage rates. Business fixed investment held up last year but appears to have slowed more recently. Manufacturing activity has slowed in response to tighter financing conditions, the stronger dollar, and some retracement of the pandemic-related shift from services to goods.

As energy prices have moderated and supply disruptions have eased, inflation has started to abate. However, the process of returning inflation to 2 percent has a long way to go and is likely to be uneven and bumpy.

Indeed, the inflation picture is less favorable than it appeared earlier this year. Part of the encouraging disinflation initially observed in the fourth quarter of last year was revised away, while inflation over the first two months of this year came in high.

The inflation data show some persistence. The 3-, 6-, and 12-month changes in February prices for the core PCE index—excluding food and energy—are all around 4-1/2 to 5 percent. Housing services inflation continues at a rapid monthly clip, contributing much more to inflation than it did before the pandemic. Inflation in non-housing core services remains sticky at elevated levels. Even core goods prices rose in January and February, after three months of declines, highlighting the uneven nature of the disinflationary process.

Even so, several factors are likely to contribute to disinflation. Long-term inflation expectations remain well anchored, and shorter-term expectations have retraced much of last year's rise.2 Rent increases on new leases have slowed sharply over the past six months, which should begin to pull down measured housing-services inflation over the course of this year. Moreover, significant supply of multifamily housing is coming online, which should take further pressure off the rental market.

Core goods inflation should continue converging toward its pre-pandemic trend of slightly negative numbers, as supply chains continue to heal and demand for goods continues to slow. Rebounding automobile production should help prices for new and used cars continue to moderate as cars become more available. More broadly in the economy, profit margins may narrow as buyers become more price sensitive and pull back on spending. Earnings calls from nonfinancial corporations already show increasing awareness of resistance to price increases.

Non-housing core services inflation is a broad category that accounts for more than half of the core PCE index. Inflation in that category looks quite persistent amid strong post-pandemic demand for travel, dining out, and medical care. Disinflation in these services will likely require some combination of slowing demand and further recovery in supply.

One potential avenue of disinflation is that a decline in prices for some goods may help lower related services prices. For instance, an eventual retreat in car prices may feed into lower prices for car insurance, repairs, and rentals, reversing some of their increases over the past two years.

Another potential source of disinflation is that wage growth has moderated somewhat, even as the labor market remains very strong by most measures. Payroll employment growth was extraordinarily robust in January and February, unemployment remains near record lows, and job openings remain very elevated.

Nonetheless, there are some signs that the labor market is softening at the margin. The Federal Reserve Board staff's measure of private employment using data from the payroll processing firm ADP suggests that job gains slowed in January and February. Job postings from Indeed show a noticeable decline. And the quits rate has retraced more than half of its pandemic-era rise, falling steadily from a 3 percent peak in late 2021 to 2.5 percent in January. That could be significant, as much of the surge in wage growth a year ago may have been driven by outsized wage gains of those changing jobs and by employers raising wages to retain existing workers.

This wage moderation may partly reflect some improvement in labor supply. Labor force participation edged up to 62.5 percent in the most recent data. Prime-age participation is now back to pre-pandemic levels. In addition, new estimates show higher population growth over the past year amid a rebound in immigration.

Over time, there is reason to believe that rising productivity also may aid supply. I see three potential sources of rising productivity growth.

First, increased innovation associated with the spurt of new businesses since the onset of the pandemic may raise productivity. Second, current labor shortages are spurring increased investment in automation that should boost labor productivity over time. Finally, a recent paper by David Autor, Arin Dube, and Annie McGrew suggests another way that the strong labor market could boost productivity.3 They find that faster wage gains for lower-paid workers have come from job-switching to higher-wage firms, which may also be more-productive firms.

Currently, however, supply in the economy continues to be insufficient to meet still-robust demand. Importantly, consumer spending has gained steam this year after slowing late last year. Consumer spending is being supported by robust growth in households' real disposable income amid strong employment growth. Strong household balance sheets have also supported spending, although lower-income consumers appear to have mostly exhausted their excess savings.

Altogether, the incoming data would suggest a somewhat higher inflation rate for this year and stronger economic growth. However, I am closely watching developments in the banking sector, which have the potential to tighten credit conditions and counteract some of that momentum.

The U.S. banking system is sound and resilient. The Federal Reserve, working with other agencies, has taken decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system. We will continue to closely monitor conditions in the banking system and are prepared to use all our tools, as needed, to keep the system safe and sound.

At the same time, I am monitoring overall financial conditions in the U.S. economy, including indicators of credit availability. I am well aware of the extensive literature linking monetary policy, credit conditions, economic activity, and inflation. Over the past 15 years, that literature came to be roughly a quarter of the syllabus in the macroeconomics class that I taught.

A particular focus over my career, including in my December NBER paper with Matt Marx and Emmanuel Yimfor, is the importance of smaller financial institutions in lending to small and medium-sized firms.4 Those smaller banks over time have developed relevant expertise in small-business lending and have worked to maintain relationships with small firms. Thus, I am attentive to whether recent banking developments will restrain credit to small businesses, which could slow innovation and growth in potential output over time.

Data dependence and monetary policy

Turning to monetary policy, I have said frequently that my approach to policymaking in uncertain times is to be data dependent. And, like everyone, my own research and experiences shape my views on setting that policy. I was at the Council of Economic Advisers during the euro-area crisis, and my work on emerging economies—particularly Russia and some African economies—has taught me how difficult it can be to forecast in highly uncertain environments.

Taking all these lessons into account, I approach all our monetary policy discussions with the same mindset:

Be prepared to adjust the outlook based on incoming data while being humble about our ability to draw firm conclusions and thus not overreacting to a few data points.

Seek out useful data sources, including high-frequency data that may better capture evolving economic developments.

And follow a risk-management approach that considers not only the expected outcomes, but also various risks to the outlook.

Of course, it is tempting to follow the old adage of "never make predictions, especially about the future." But ultimately, policymaking must be forward-looking, which means relying, at least in part, on forecasts. The challenge is to figure out which models apply. For example, when I began studying banks in the post-Soviet era for my dissertation, I found that the standard models used in normal times and for mature, industrialized economies are less useful in highly uncertain environments.

Since my first FOMC meeting last June, my data-dependent, risk-management approach has led me to support the Fed's response of frontloading monetary policy tightening to bring inflation under control.

After the swift policy response of the past year, monetary policy is now in restrictive territory. For instance, real interest rates are positive across the yield curve.5

Going forward, I am weighing the implications of stronger momentum in the economy against potential headwinds from recent developments. On the one hand, if tighter financing conditions restrain the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence. On the other hand, if data show continued strength in the economy and slower disinflation, we may have more work to do.

The FOMC has been raising rates in smaller increments as we seek a sufficiently restrictive monetary policy stance to return inflation to 2 percent over time. By taking smaller steps, we can observe economic and financial conditions and consider the cumulative effects of our policy actions.

For the econometricians, this approach is similar to the iterative procedure in maximum likelihood estimation, where large early steps are followed by smaller steps as you approach the local optimum.

In its March policy statement, the FOMC dialed back its forward guidance on the path of the policy rate.6 We shifted from anticipating "ongoing increases" to saying that "some additional policy firming may be appropriate." I think this communication is appropriate as we seek to calibrate monetary policy to be sufficiently restrictive amid uncertainty about the economic outlook.

Yet what should not be uncertain is our commitment to our dual-mandate goals of maximum employment and price stability. We will do what it takes to bring inflation back to our 2 percent target over time, which will lay the foundation for sustainable strength in the labor market and the U.S. economy.

1. These views are my own and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. As shown, for example, in surveys from the University of Michigan and the Federal Reserve Bank of New York. Return to text

3. See David Autor, Arindrajit Dube, and Annie McGrew (2023), "The Unexpected Compression: Competition at Work in the Low Wage Labor Market," NBER Working Paper Series 31010 (Cambridge, Mass.: National Bureau of Economic Research, March). Return to text

4. See Lisa D. Cook, Matt Marx, and Emmanuel Yimfor (2022), "Funding Black High-Growth Startups," NBER Working Paper Series 30682 (Cambridge, Mass.: National Bureau of Economic Research, November). Return to text

5. These real interest rates are based on prices from Treasury Inflation-Protected Securities (TIPS) and inflation swap markets, as well as survey expectations. Return to text

6. See Board of Governors of the Federal Reserve System (2023), "Federal Reserve Issues FOMC Statement," press release, March 22. Return to text

Last Update: March 31, 2023

THE WASHINGTON INSTITUTE FOR NEAR EAST POLICY : THE URGENT U.S. ROLE IN RESTARTING IRAQ-TURKEY OIL EXPORTS by Michael Knights PolicyWatch 3727 March 31, 2023

THE URGENT U.S. ROLE IN RESTARTING IRAQ-TURKEY OIL EXPORTS

by Michael Knights

PolicyWatch 3727

March 31, 2023

A pipeline arbitration ruling has imperiled a 

recent Baghdad-Kurdistan breakthrough, but 

this roadblock can be removed if the United

 States acts urgently to disrupt spoilers and 

help constructive players.

READ THIS ITEM ON OUR WEBSITE

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On March 25, the International Chamber of Commerce (ICC) in Paris issued its long-awaited ruling on an arbitration brought in 2012 by Iraq, which claimed that Turkey had violated multiple aspects of the Iraq-Turkey Pipeline (ITP) agreement of 1973 (which was updated in 1976, 1985, and 2010). Baghdad claimed that Turkey’s pipeline operator BOTAS should have sought explicit permission from the Iraqi federal government before allowing the Kurdistan Region of Iraq (KRI) to transport, store, and export Iraqi oil using the ITP and related Iraqi-owned export facilities at Turkey’s Ceyhan port.

The arbitral ruling is not public, but what has been leaked (and not denied by either party) is that on at least one of the five claims, the ICC found in favor of Iraq, and that it issued a binding award of $1.46 billion (plus interest) to Baghdad for part of the assessed period (2014-18, with 2018-23 and some earlier periods left for a later award decision). Most clearly, Turkey, a signatory to the New York Convention on arbitrations, informed Baghdad on the day of the ICC ruling that it would respect the decision and not operate the ITP or allow loading of KRI-produced crude oil from Ceyhan until it received Iraq’s permission to do so.

As a result, nearly 500,000 barrels per day of crude oil (420,000 marketed by Kurdistan and 80,000 by Iraq) have ceased being exported to Turkey and elsewhere, almost eliminating the entire income of the KRI, with its population of around five million. If the stoppage persists for weeks or months, an economic crisis will overcome the Kurds and begin to shift oil prices upward. In parallel, the main foreign investors in Kurdistan—including a number of U.S. oil companies—will have to shutter their projects.

The Stoppage: Why, and Why Now?

The key question to ask is not just why the ruling was released, but why now, and who stood to gain? The ruling was not expected at this exact moment. This is because the ICC does not like to be seen as interfering in politics or oil flows, and the current moment is sensitive in both Turkey (where tense elections will take place on May 14) and Iraq (where a painstaking process had almost achieved a breakthrough in Baghdad-KRI energy and revenue issues; see the author’s recent piece on the breakthrough). Although the ruling was issued shortly after an Iraq-Turkey summit, the proximate timing seems to have been forced by leaks, spurring the ICC to publicize its partial deliberations.  

Within Iraq’s Coordination Framework—the militia-run, Iran-backed body that forms the core of political support for Prime Minister Mohammed Shia al-Sudani—the faction most skeptical of the emerging Baghdad-KRI budget and oil deal is that of former premier Nouri al-Maliki. Sudani and a range of framework actors (Hadi al-Ameri, Ammar al-Hakim, Haider al-Abadi) have been willing to forward the deal with the KRI, but Maliki and another player—U.S.-designated terrorist and human rights abuser Qais al-Khazali—have consistently sought to flex their muscles within the framework by pushing for a tougher bargain with the Kurds.

There seem to be three reasons for this: first, Maliki and Khazali want to dominate both the framework and Sudani; second, they are the framework members who have the worst relations with the Barzani clan, which leads the KRI; and third, a late-stage wrench in the works of the Baghdad-KRI agreement may benefit the Patriotic Union of Kurdistan (PUK)—the counterweight to the Barzanis—whose leader, Bafel Talabani, is already in Baghdad to mediate an outcome with the Coordination Framework.

What Are U.S. Interests?

U.S. national security interests are clear: the removal of half a million barrels from global markets is never welcome, but it is an especially dangerous development in the midst of the Ukraine conflict and at a moment when U.S. adversaries like Russia and Iran want to raise oil prices. The impact of the loss of KRI oil was ameliorated by coincident market conditions related to containment of the banking crisis, and by unrealistic market expectations that the stoppage would be short, but these counterbalancing factors may fade. Other oil flows can be lost at any moment—by crisis, weather, or accident—and the avoidable (and still reversible) loss of Ceyhan exports removes some of the buffer in already tight global markets.

Furthermore, the United States has a direct interest—in terms of income, jobs, and stock market value—in the American investors who will be hurt by the pipeline closure if it persists for even a few weeks. For Iraq, the $1.4 billion value of the arbitral award (and a subsequent tranche on a similar scale covering 2018-23) would be rapidly wiped out by the loss of 80,000 barrels per day of Iraqi-sold oil flows through Ceyhan. Turkey could find its efforts to reduce dependence on Iranian and Russian oil reversed, not to mention the potential delay of much-needed KRI gas exports to Iraq or Turkey and Europe. Further, Iraq’s investment-friendliness would be damaged by the collapse of U.S. investments—which is expressly not in line with recent U.S. economic policy or the energetic efforts of the U.S.-Iraq Chamber of Commerce. The KRI, a key U.S. partner in counterterrorism and refugee assistance, would be economically destabilized, and some of its oil would find its way out via Iran, benefiting the U.S.-sanctioned regime in Tehran.

The current situation is thus a lose-lose-lose-lose for the United States, Iraq, Turkey, and the KRI. In a confusing situation, it is important to focus on what needs to happen to keep oil flowing through the ITP: the Iraqi government must instruct the State Oil Marketing Organization (SOMO) to send a letter to Turkey that

1. requests the reopening of the pipeline and all storage operations, and
2. provides a set of tanker loading instructions to allow April shipments to proceed.

Both parties would recognize the arrangement as a time-limited emergency step to prevent economic damage to Iraq (including the KRI), to Turkey (as counterparty in the fee-earning ITP, which has minimum throughput commitments by which both sides must abide), and to global markets in Europe and Asia. It would also give Iraq and Turkey time to settle the arbitration issues. Baghdad and the KRI could similarly take a breath and return to the negotiating table, where the fundamentals of the recently approached deal are still valid.

U.S. Policy Options

As the United States focuses on affirmative steps in its Middle East policy—making progress, not just fighting wars—the most consequential and beneficial thing it can do in Iraq is to help the country find peace with its largest ethnic minority, the Kurds. A historic budget deal and oil law between Baghdad and the KRI are closer than ever, so Washington should push hard to get it completed. It is possible that the pipeline will reopen quickly—even in the coming days—but if it does not, the United States must act decisively. This means extending its good offices to all non-spoiler parties to help get Iraq-Turkey and Baghdad-KRI talks back on track. The following steps would be most helpful in that regard:

• Get more involved in Baghdad-Ankara negotiations. As this author has noted for years, the ITP arbitration has always offered a platform to drive U.S. policy objectives regarding Iraq-Turkey relations, and it still does. The partial award of $1.46 billion to Baghdad helps set expectations for the second tranche, and this in turn can help Washington mediate between Baghdad and Ankara over water, electricity, trade, and infrastructure.
• 
  
• Provide financing for assumption of trader debts. On the specific issue of oil marketing at Ceyhan, the United States can help Iraq obtain financing to “buy” the KRI’s debt to oil traders (which is likely $2-4 billion). This would allow several things: for trading to be passed to SOMO; for Iraq to achieve better per barrel prices on KRI-operated crude; and for oil to pass only to end-users that SOMO permits. One option might be for the U.S. government to buy Iraqi oil to restock the Strategic Petroleum Reserve.
• 
  
• Support constructive players. Bafel Talabani of the PUK has the requisite relationships in Baghdad to un-block the exports and pick up at the promising point where the budget and oil law negotiations left off. The United States provides the PUK with close military and intelligence support and should leverage this relationship to motivate Bafel to counter spoilers such as Maliki.
• 
  
• Warn spoilers to back off. The U.S. government knows exactly who is trying to torpedo or leverage the deal. One such spoiler is Maliki, whom Washington came within a whisker of sanctioning for corruption in late 2020. Any parties actively trying to undermine the Baghdad-KRI deal—at a cost to Iraq, Kurdistan, and regional stability—must receive a firm and explicit warning that they will be sanctioned if they are proven to have threatened Iraq’s stabilization.

Michael Knights is the Bernstein Fellow at The Washington Institute and author of its 2022 paper “The Necessary U.S. Role in Fixing the Baghdad-Kurdistan Energy Dispute,” which provides detailed advice on specific areas of technical assistance Washington can provide to smooth the path toward energy sector reconciliation.

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THE WASHINGTON INSTITUTE FOR NEAR EAST POLICY

Secretary Antony J. Blinken Virtual Remarks on Russia’s Accountability for the Crimes in Ukraine 03/31/2023 03:05 PM EDT

Secretary Antony J. Blinken Virtual Remarks on Russia’s Accountability for the Crimes in Ukraine

03/31/2023 03:05 PM EDT

Antony J. Blinken, Secretary of State

Kyiv, Ukraine

Bucha Summit

SECRETARY BLINKEN:  Hello, everyone. 

President Zelenskyy, Foreign Minister Kuleba, thank you for bringing together so many partners and friends of Ukraine for this important and solemn summit.

One year ago today, when Ukrainian forces liberated Bucha, they discovered a massacre.  Hundreds of men, women, and children killed indiscriminately by Russian forces. 

On one street alone, they found 40 bodies. 

The entire world soon witnessed the evidence of those crimes, in searing photographs and videos. 

Executed civilians, with hands tied behind their backs, a children’s summer camp converted into a torture chamber, mass graves. 

And we heard the testimonies of survivors as well.  People who had been raped by Russian soldiers.

A 14-year-old boy whose father was shot in front of him. 

Families who were not allowed to bury their loved ones. 

Each of these pieces of evidence documents the suffering of individual human lives.  Families torn apart.  Communities that will never be the same.  And in the year since, evidence has continued to mount of similar atrocities committed by Russian forces across Ukraine. 

These acts are part of a campaign of widespread and systematic violence against civilians. 

A pattern of rape, torture, enforced disappearances, forced deportation of children, and execution. 

Attacks on homes, schools, hospitals.

When I visited Irpin, I saw the ravaged apartment buildings. 

In Kyiv, I heard from children who had been wounded in Russia’s relentless targeting of civilians. 

Russian forces and officials have committed – and continue to commit – war crimes and crimes against humanity in Ukraine. 

And those who have committed these atrocities must be held accountable.

The United States supports Ukrainian and international efforts to document and investigate these atrocities.

Today, we join countries and organizations from around the world to continue demanding justice for Ukrainians and Ukraine. 

We repeat that what happened in Bucha and in other cities — and what continues to happen in Ukraine – is unacceptable. 

And we recommit ourselves to “the dignity and worth of the human person,” as affirmed in the United Nations Charter. 

The United States will keep standing with Ukraine, as it protects its people and fights for its sovereignty, its territorial integrity, its democracy.

We will not forget the Ukrainians who have suffered and have been killed.

And we will continue pushing for accountability and for justice for as long as it takes.

Thank you.

Brookings : “China’s uncertain economic outlook for 2023” Washington, D.C. Monday, March 6, 2023

 DOLLAR & SENSE: THE BROOKINGS TRADE PODCAST

“China’s uncertain economic outlook for 2023”

Washington, D.C.

Monday, March 6, 2023

Guest: 

ESWAR PRASAD

Tolani Senior Professor of Trade Policy; professor of economics

Cornell University

Senior Fellow, Global Economy and Development

The Brookings Institution

Host: 

DAVID DOLLAR

Senior Fellow, Foreign Policy, Global Economy and Development,

and the John L. Thornton China Center 

The Brookings Institution

Episode Summary

Eswar Prasad, a senior fellow in Global Economy and Development at 

Brookings and a professor at Cornell University, and host David Dollar discuss 

the outlook for China’s economy in 2023 as the annual National People’s 

Congress convenes in Beijing. Discussion topics include China’s economic 

growth, local finance and real estate, the role of China’s private sector in the 

economy, and what policies might emerge from the meeting.

[music

DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast Dollar and 

Sense. Today my guest is Eswar Prasad, an economics professor at Cornell 

University and a senior fellow here at the Global development wing of Brookings. 

China’s National People’s Congress will run for about a week starting March 5th. And our topic is going to be China’s economy and some of the policies that might emerge from that annual meeting. So, welcome to the show, Eswar.

PRASAD: Thank you as always for having me on your podcast, David.

 

DOLLAR: So, let’s start with general picture. Last year, China grew more slowly than the world economy as a whole for the first time in decades. It’s clearly going to bounce back to some extent. What’s your general sense for 2023? Where do you see strengths? Where do you see weaknesses? 

PRASAD: So, last year, David was certainly a very difficult year. First there was the zero-COVID policy, which was being implemented very stringently, and then that policy was reversed and that led to some disruptions as the economy readjusted to the end of zero-COVID. But now things seem to be stabilizing. And part of the reason we are seeing some good growth momentum, of course, is a snap back from a very difficult 2022.

But it looks like 2023 overall is going to be a decent year for China. The most recent data that came in on manufacturing sector activity does seem quite promising. We’ve seen the industrial sector overall holding up quite well, especially fixed asset investment. The services sector also seems to be doing quite well. 

But there are going to be some challenges over the coming year. In particular, we’ve seen household consumption be relatively weak over the last couple of quarters and the question is whether the government is going to be able to put in place policies and make the right sort of moves that would give the private sector the confidence it needs for households to go out and save more, and for private businesses in particular to go out and invest more. We’ve seen investment holding up quite well, but a lot of that seems to be coming from the public sector. 

There is a fair bit of room, of course, in terms of macroeconomic policies for the government because inflation is reasonably well contained. CPI is at a modest level and there is in fact producer price deflation. The renminbi seems to be holding together quite well after having gone through some depreciation last year. So,overall, I think 2023 is going to be a decent year for China in terms of all of the components of growth.

 

DOLLAR: So, as you say, Eswar, consumption was particularly weak in 2022, 

especially last few quarters of data. And I think there’s a little bit of a puzzle there because we also see this data that household deposits in the banking system have risen quite dramatically. There seems to be a lot of pent up saving, as we saw in the United States and some other economies. And then as the COVID measures were taken away, people went out and spent. 

In China, I feel like we don’t see such a strong rebound of consumption yet. And one thought I’ve had is that perhaps upper middle-class, wealthier households kept their income and put a lot of money away during the COVID period. But a lot of ordinary households, migrant workers especially, lost their jobs, lost their income, and they don’t have pent up demand. So, I wonder if there’s something the government can do to really jumpstart that consumption path, get the broad mass of people back consuming on the trend they were on pre-COVID. 

PRASAD: That’s certainly a striking feature of what happened in China over the last year and even in recent months. As you correctly point out, the savings rate did rise quite significantly, the household saving rate. And of course, this may have been for precisely the reason that you pointed out, that those who still had money were the people with relatively lower marginal propensities to consume, while those at the lower end of the income distribution ended up with much less money. 

And we also saw this affecting the services sector. Of course, when you have an economy that is basically shut down, the services sector and spending on services does tend to decline. 

Now, the big question is whether there are other overarching forces, such as the degree of uncertainty people might feel and also the implications for their wealth because of what has been happening in the property market. The property market, of course, had a very rough last half of last year, and a lot of Chinese household wealth is tied up with the property sector. And as you have written, of course, it does account for a significant part of China’s economy. So, the fact that the property sector is not doing so well affects households’ perception of their wealth dynamics, and it also affects their perception about where the economy is going and their employment prospects. 

So, I think the degree of uncertainty in the economy right now in both of these fronts might be holding back consumption. 

So, this is where, again, what the government is willing to do in terms of its stimulus policies, including potentially some fiscal measures such as tax cuts and so on, that could encourage consumption by households, might in fact help correct some of this balance. 

But certainly over the last year or two, we’ve seen a bit of a setback to the government’s objective, a long held objective, of rebalancing growth such that it is driven more by private consumption rather than by investment. I know they are eager to get that balance back, but I think it’s going to take some work.

 

DOLLAR: So, you brought up a couple of good topics for us to take up in a little bit more detail. One is the issue of local government finance and another is real estate, closely related issue of real estate. Why don’t we take the real estate first. Do you think real estate can get back to the role it was playing for a long time as a key foundation of their growth, or is in some sense that story largely over? And do you have ideas about what they should be doing in the real estate sector? 

PRASAD: So, real estate is quite important to the economy. Now, whether that’s such a good thing or not, this is open to debate. Certainly the property sector has been a key player in terms of overall growth in China in addition to accounting for a significant amount of household wealth, directly or indirectly touches a large share of the economy. 

But having said that, certainly we’ve seen a lot of problems in the property sector: relatively large speculative booms in prices, followed by busts as the government tries to manage those speculative booms. We also see this never ending dichotomy in China that you have a lack of affordable housing, especially in many urban areas, while there seems to be overcapacity in certain other areas, and many people had been buying houses as investment properties and ended up not using them as rentals, and so on. So, there are lots of difficult issues with the real estate sector. 

And of course, one question is whether trying to, you know, put the clamp on the property sector in order to reduce the speculative run up in prices sets off other dynamics that could lead to financial sector problems. My sense is that, again, there are going to be some ructions in the property market as we go along, and there are certainly some developers who are very exposed. And over the last couple of years we’ve seen some of them, such as Evergrande, coming to deep financial problems and burst out. And there are some relatively small- to medium-sized banks that are very exposed to those developers. So, I think we will see some problems spillover into the financial sector and the broader economy, but it looks like those can be contained. 

So, in the future, are we going to see real estate once again become a major driver of growth? Again, a stable real estate sector that is generating the sort of housing that China really needs might be a probably a good thing. The question again is whether one can do that without having the attendant cause, such as a speculative run up in prices that once again the government has to step in to quash. 

One of the key aspects in all of this, as you well know, David, is what role the government plays in the property market. And I think this is one of the elements that has led to volatility in house prices. The question about whether the government is actually going to backstop some of these developers, some of the banks that are very exposed or if at other times, as it has indicated, it wants to stay out of the property market and let market signals, market forces entirely determine the outcomes there. 

DOLLAR: Yes, I understand that the government, particularly some local 

governments, are being pretty active about getting developers to finish half done projects where many people have already paid for the apartments. And I think that was really a pretty serious risk for the economy and for them and for the party, you know, frankly. So, they seem to be pretty interventionist to get those things completed. I’m not sure they’re going to be so interventionist going forward. 

PRASAD: Yeah, that’s exactly right. And I think there are social stability considerations when people have put down deposits for apartments and then the developers that they have put those deposits down with disappeared, there is a sense that the government should perhaps be doing something about it. And of course, when we look at what the government has been doing recently to stabilize the property sector, some of the requirements they put on mortgage holdings and so on, they eased some of those in recent months. So, again, the government does remain quite involved in the sector and that, I think, adds to the instability to some extent. 

DOLLAR: I think it’s interesting that the topics that we naturally want to talk about concerning the Chinese economy, they’re so interrelated. You know, it’s really quite hard to divide things up. Local governments have relied very much on revenue from real estate development. They basically auction off undeveloped land. In many cases, it’s a pretty clean process. It’s a source of revenue for local governments and they’ve used that to finance a lot of their activities. And now with the real estate downturn, we see in the data that what they’re getting from auctioning off property is declined very significantly, and that’s a source of their financial troubles. 

And then the financial troubles affect people’s consumption. You probably saw the stories about pensioners demonstrating because some local governments that are under severe fiscal stress have basically tried to change the rules of the pensions in order to save money. And people, of course, are unhappy about that. And then that’s got to affect their consumption. If they stick with those changes, reducing people’s pensions, then that’s going to have to affect their consumption. So, are there some solutions to the local government finance issue other than going back to the days of real estate bubble? 

PRASAD: No, you’re right, David, that property revenues from the property sector, from property sales and so on have been very important for local governments and many of them are under significant financial duress. 

Now, the longer term perspective on this, of course, is that the central government in Beijing has been trying very hard to inculcate fiscal discipline among the local governments, many of whom had been using local government financing vehicles, LGFVs, to issue debt even after they were put under constraints to limit the amount of debt that they could issue. 

But we’ve seen that trying to manage these problems does create a whole ripple of other problems. In fact, I should probably turn this question over to you, David, because after all, you are the true fiscal expert here, having written extensively on these areas. Do you see an easy way out of these problems that some local governments are facing? 

DOLLAR: Well, I feel like people like you and me have said for a long time they need a property tax. And I still think that’s true. And it’s a little bit surprising that they haven’t introduced that in a significant way. That could be a source. But I have seen some recent analysis suggesting that that would only be a small part of the solution, that basically they don’t collect enough taxation. The personal income tax collects a very small share of GDP. It may look fairly onerous on paper, but they don’t actually collect a lot from the personal income tax. They don’t tax capital gains in general. So, they’ve reached a stage of development where they think they need some serious tax reform that’s really aimed at collecting a fair amount of resources from this booming economy. 

PRASAD: And in fact, on the central-local government fiscal relations, again, this is a subject you have written extensively on, I think that there are a variety of things that have been talked about for a while but not much progress has been made yet in terms of smoothing things out there. 

DOLLAR: Yeah. So, most of the revenue’s collected by the center, most of the expenditures at the local level, there’s a complicated system of transfers, it doesn’t have clear parameters that are fixed in place. I think to devolve some of those taxes to the local level probably makes a lot more sense. But it’s a very complicated issue. 

So they really need careful analysis and careful reform and they need to make sure they’re collecting enough revenue and that it’s going to the places where the government’s providing services, which is often local level. 

Aside from 2022 being a poor year overall, I also found it noteworthy, as you said, fixed asset investment overall held up fairly well. But then when you pass that, it’s mostly government investment in infrastructure and state enterprise investment. And the figure I saw on the growth of private investment—and this is a nominal figure—was about 2% growth in 2022. So, that’s really pretty shocking. 

And I think there’s a sense that a combination of the shocks like COVID plus the deliberate policy of the Communist Party is putting more favor on public enterprises, public investment rather than private investment. 

But then we see something of a charm offensive coming from the senior officials, including Xi Jinping, talking about the importance of the private sector, especially small and medium enterprises, something of a charm offensive. So, how do you see that effort to really reassure private investment, both domestic and foreign? 

PRASAD: Yeah, the signals, as you point out, David, had really been quite mixed. 

As you said, last year was a tough year on the economy more broadly, and then the leadership transition last fall, and many of the signals emanating around those meetings did suggest that China was not going to be that conducive a place for private enterprise. 

But then the signals that we have seen in late December over the last few weeks suggests that the government views the private sector as still playing a critical role in the economy. And the reality is that in order to accomplish their growth objectives, both in the medium-term and the short-term, they really need the private sector. If you look at productivity growth in some of the state owned enterprises, it’s actually not been that bad. 

But the reality is that what China wants to accomplish, especially in the face of many headwinds, such as weakening demographics, less ability to rely on external markets to soak up a lot of China’s output, and so on, is that they’re going to need to reorient their domestic economy, get more growth coming out of services, and especially from small and medium enterprises in the services sector, but perhaps also in manufacturing in order to generate better employment growth, but most importantly to generate higher productivity growth. 

And they have this plan, of course, of trying to move towards more indigenous innovation and other aspects of moving up the value added chain. 

All of this can be done with the state sector, but it’s much more inefficient to do it that way. And I think in terms of employment generation, the capital intensive, state sector-led growth model has not worked very well. So, of course in China we hear about the fact that the labor force is not only not growing, but in fact might be shrinking by some measures as being a major constraint. But at the same time, we seem to have a large pool of unemployed workers at the moment, and absorbing them is going to be key. 

So, we do seem to be getting a signal from the Xi Jinping government that in fact there is going to be room for the private sector, and the private sector will play an important role in many of the objectives that they need, especially if they want to accomplish this goal of becoming an upper middle income economy over the next 10 to 15 years. So, if you think about getting to a per capita income somewhere in the range of $20,000, that’s going to take pretty decent growth, and it’s hard to do that without the private sector. 

So, this slightly schizophrenic approach we are seeing, at least in terms of the statements coming out of the Xi Jinping government, certainly don’t inspire confidence in the private sector. So, we’ll have to see whether there will be enough in terms of actions and of course, the appointments of people who are seen as reformers and willing to give the private sector some space. And that’s going to be very important in the coming months. 

DOLLAR: We’re going to see the retirement of some pretty effective technocrats, people like Leo Hu and Yi Gang as the head of the Central Bank. These are people who have been friends of ours and we’ll find out during the National People’s Congress, certainly we already know who the new premier will be: Li Qiang. Some of the other appointments not completely clear right now, and we’ll find out. Is this going to have a large effect particularly on the foreign private sector? 

PRASAD: I think it is because many of the people that you mentioned—Governor Yi Gang of the PBOC, his predecessor, Governor Zhou Xiaochuan, and Leo Hu—these are people who are seen as reformers and also had a presence on the international stage, so they were apparently willing to say the right thing to their superiors, the top leadership of the Communist Party of China, in terms of reforms that were necessary, and were able to sell those reforms to their domestic leadership but also to the rest of the world. So, I think that was comforting to domestic investors and international investors. 

Now, there have been some names bandied about, of course, about who could take over the key financial and regulatory positions that are likely to see some turnover right now. Now, some of the names that have come up are of people who seem to be party loyalists, but some of them also seem to have a tradition of having worked in provinces or in areas where they did encourage the private sector to play an important role. 

So, it’s going to be a little interesting and important to see not only who the people are that are appointed, but what sort of signals come out of the NPC in terms of what the reform agenda might be, particularly in terms of the financial sector, which of course is a matter of great interest to both you and me, David, because ultimately we need the economy to be allocating resources more efficiently in order for China to accomplish its growth objectives. But also reforms in other areas like state enterprises and so on. But certainly there’s been at least modest progress in terms of hardening the budget constraints on SOEs, but a lot more needs to be done. 

So, who the people are, what their reformist orientation is going to be, and how effective they will be at pushing that reform agenda are all key questions to which we will start seeing answers in the next few days, but then the next few months are going to be quite important as well in terms of figuring out the direction of policies. 

DOLLAR: Right. So, the National People’s Congress by itself is not going to tell us that much. We’ll get some appointments, but we’ll have to wait and see what is actually implemented in terms of policy. And we may get some broad policy direction in some of the speeches, but the details will come later. So, I think I think you’re right, we’re going to have to see what happens over the next few months. 

It’s an interesting contradiction that a lot of Xi Jinping’s kind of overall rhetoric is state oriented and somewhat discouraging to the private sector. But then, they’re determined to grow at a pretty healthy rate. And to do that, they have to implement policies that are somewhat favorable to private initiative and private investment. So, it’s an interesting contradiction. 

PRASAD: That’s right, China does seem to want to have it both ways, make sure that the state sector does deliver in terms of the growth objectives that the government has and the private sector to play a role, but within constraints. And that conundrum, of course, is an important one to see how it plays out, because it’s a little difficult to think about the private sector contributing in an effective way to growth and especially to innovation and productivity growth if there are going to be lots of constraints on the private sector. 

So, keeping the private sector on a tight leash but at the same time getting the private sector to deliver all the objectives of the government wants is going to be a tough balance to manage. 

DOLLAR: So, I’ve saved for last, Eswar, the thorny question of U.S.-China relations. 

And I feel like that’s also really complicated situation because there’s a lot of hostile rhetoric back and forth and there are a lot of specific measures, particularly from the U.S. side, constraining certain types of trade, you know, export of high technology products and putting various Chinese firms on our entity list, which really restricts their ability to interact with American firms. 

And yet, 2022 was the biggest year of trade, China-U.S. aggregate trade that we’ve ever seen. And it’s kind of surprising how well trade has held up despite the Trump tariffs, 25% on about half of what we import—those have been left in place by the Biden administration. So is this a stable equilibrium to have pretty tight restrictions in a few areas, but overall trade seems to be booming? Or is this just the kind of inflection point that maybe what we got in 2022 was a lot of momentum from the past, but as these measures bite maybe we’ll be on a downward trend? Now, of course, it’s impossible to know what’s going to happen, but I’d love to hear your thoughts. 

PRASAD: Well, David, as you well know, it’s very difficult for the two largest economies in the world to dance around each other. That relationship is going to be a little difficult to completely disengage from. But the political dynamics, especially on the U.S. side, do suggest that it’s going to be a thorny road. And on the U.S. side we see this combination of technology policy, which is taking the form of industrial policy if you look at the Inflation Reduction Act or the CHIPS Act, tied in with the national security policy, and that’s spilling over into trade policy. 

And in all of these areas, certainly there are many targets out there, but what the government in the U.S. seems to want to do in terms of making its supply chains more resilient, in terms of its reducing its exposure to need products—pharmaceuticals, electronic products, and so on for the rest of world—that I think is going to lead to further restrictions in China. And of course, sitting here in Washington, you and I know that there seems to be very strong bipartisan support on the Hill to look and act tough on China. 

One of the other concerns I have, which again, is an area you’ve written about, David, is that once upon a time the economic relationship between China and the U.S. was seen as a positive-sum game where both sides could gain from the relationship, while the geopolitical element was seen as a zero-sum game—for China to gain more influence the U.S. would have to lose some of its influence. But the economic relationship acted as a bit of a counterweight to the geopolitical tensions and served as a balancing force. 

But right now, even on the economic side, we are seeing escalating tensions. 

Although there are periodic attempts by both sides to bring down the temperature a little bit. But I think they are going to remain at an elevated level. 

So, now the two—the economic tensions and the geopolitical tensions—seem to be feeding off each other. So, I do worry that we’re in for a period where there could be even more restrictions from both sides in terms of trade and financial flows between the two countries. 

DOLLAR: I’m David Dollar, and I’ve been talking to my colleague Eswar Prasad about the economic challenges that China faces as it goes into its annual National People’s Congress. Tremendous uncertainty, but some green shoots in the various issues we took up, but a lot of risk hanging over the whole China picture. So, thanks for joining me, Eswar. 

PRASAD: Always a great pleasure talking to you, David. 

[music] 

DOLLAR: Thank you all for listening. We release new episodes of Dollar and Sense every other week. So, if you haven’t already, follow us wherever you get your podcasts and stay tuned.  

It’s made possible by support from producer Fred Dews, audio engineer Gastón Reboredo, and other Brookings colleagues. If you have questions about the show or episode suggestions, you can email us at Podcasts at Brookings dot edu. Dollar and Sense is part of the Brookings Podcast Network. Find more Brookings podcasts on our website, Brookings dot edu slash Podcasts.  

Until next time, I’m David Dollar and this has been Dollar and Sense

FPIF : MIDNIGHT IN THE GARDEN OF GOOD AND EVIL Ukraine is fighting against two evils simultaneously: the reality of Putin and the possibility of nuclear war. By John Feffer | March 29, 2023

 MIDNIGHT IN THE GARDEN OF GOOD AND EVIL

Ukraine is fighting against two evils simultaneously: the reality of Putin and the possibility of nuclear war.

By John Feffer | March 29, 2023

The prospect of a nuclear holocaust has always been terrifying. But in the last years of the Cold War and the three decades that followed its end, the existential challenge of nuclear weapons became less of a clear and present danger.

Sure, in the post-1991 era, nuclear war could still happen by mistake. It could break out between two actively hostile nuclear powers like India and Pakistan. It could be triggered by a disgruntled new nuclear club member like North Korea. And, of course, a conflict between the superpowers themselves—United States, China, Russia—could escalate to a nuclear exchange because of miscalculation, misinformation, or simply a few missing synapses in the brains of the leaders.

But what had once been a front-and-center obsession during spikes in Cold War tensions—from backyard bomb shelters to films like The Day After—had become in recent years more like ominous but muted background music. Meanwhile, other existential crises stepped to the fore, like climate change, pandemics, and artificial intelligence run amok. Apocalyptic ends have still loomed large in the public imagination: not so much with a bang any more but a whimper.

Now, after Russia invaded Ukraine last year, nuclear war is once again competing to become the planetary catastrophe de jour. The Russian decision this week to station tactical nuclear weapons in Belarus, possibly bringing them closer to deployment, has analysts in the West second-guessing the Kremlin’s calculations. Would Russian President Vladimir Putin actually go nuclear, either to gain battlefield advantage or to stop a successful Ukrainian counteroffensive from restoring the country’s pre-2014 borders?

This prospect of a nuclear war, however limited, has pushed quite a few peace activists in the West to urge a ceasefire and negotiations at whatever the cost. Policy analysts, too, have warned Ukraine not to overreach, for instance by threatening Russian control of Crimea, out of concern that the conflict could escalate to the nuclear threshold.

The threat of nuclear war should never be treated casually, particularly when such weapons are in the hands of madmen like Nixon, Trump, or Putin. This January, the Bulletin of Atomic Scientists moved their Doomsday Clock to 90 seconds to midnight. It’s never before been so close.

All of this requires a sober assessment of the nuclear risks involved in the Ukraine war and what can be done to minimize them.

The Clock Strikes Almost Midnight

Back in 1991, the Doomsday Clock stood at 17 minutes before midnight. That’s the greatest margin of safety since the clock debuted in 1947. Subsequent U.S. presidents squandered an historic opportunity to rewind the clock even more. Despite the reassurances provided by Barack Obama that he was indeed committed to nuclear disarmament—if not during his presidency then at some undefined time in the future—the clock remained poised several minutes before midnight for most of his tenure in office. When Trump took office, the measurement switched from minutes to seconds. Then this January, the second hand ticked down from 100 seconds to 90.

The Bulletin’s well-reasoned decision to advance the clock places all the blame on Russia. The editorial discusses Russian threats to use nuclear weapons, its violations of international law, its false accusations concerning Ukraine’s alleged weapons of mass destruction. “Russia’s invasion of Ukraine has increased the risk of nuclear weapons use, raised the specter of biological and chemical weapons use, hamstrung the world’s response to climate change, and hampered international efforts to deal with other global concerns,” the editors write.

At the same time, the Bulletin stresses the need for the United States to keep open the option of “principled engagement” with Russia to reduce the risk of nuclear war. There is no recommendation that Ukraine or its supporters pull their punches to reduce this risk. Instead, the editors speak of “forging a just peace.”

Although the Doomsday Clock is a powerful visual suggestion that the threat of nuclear war has increased with the conflict in Ukraine, Western politicians and analysts have downplayed the actual risk of a nuclear attack. Here, for instance, is the assessment of the Institute for the Study of War, which produces an influential daily analysis of the military and political developments in Ukraine:

The announcement of the deployment of tactical nuclear weapons to Belarus is irrelevant to the risk of escalation to nuclear war, which remains extremely low. Putin is attempting to exploit Western fears of nuclear escalation by deploying tactical nuclear weapons to Belarus. Russia has long fielded nuclear-capable weapons able to strike any target that tactical nuclear weapons based in Belarus could hit. ISW continues to assess that Putin is a risk-averse actor who repeatedly threatens to use nuclear weapons without any intention of following through in order to break Western resolve.

It might seem counter-intuitive to argue that Putin is a “risk-averse actor.” Didn’t he invade Ukraine last year without sufficient preparation? Didn’t he put Russia’s economy at risk of serious damage because of the invasion? Hasn’t he cavalierly destroyed several decades of carefully cultivated relations with Europe and the West?

In fact, with the exception of the ill-prepared invasion itself, Putin has been quite careful. He took pains to sanction-proof the Russian economy and replace European oil and gas clients with Asian ones. He hasn’t shifted to a war economy. Nor has he declared an all-out aerial war on all parts of Ukraine (though that’s likely because of Ukraine’s air defenses).

Most importantly, he hasn’t risked direct confrontation with NATO powers. The most logical strategy for Russia at this point is to interdict Western shipments of arms to Ukraine. Back in March 2022, the Russian government warned that it would do so. But it has failed to do so. Partly that’s because Russia lacks capacity and military intel. But it’s also because Putin doesn’t want to draw NATO into the war. It’s been hard enough for Russia to fight against Ukrainian soldiers and a handful of international volunteers. The introduction of NATO battalions would be game over for Russia.

Russia’s use of tactical nuclear weapons could also draw NATO more directly into the conflict, which no doubt restrains Putin’s hand. The fact that Xi Jinping, on his recent trip to Moscow, explicitly warned Putin not to use nukes only reinforces the prohibition.

Not everyone believes that the risk of nuclear war is “extremely low,” as ISW put it.

Longtime security analyst Carl Conetta agrees that the likelihood of a direct Russian nuclear strike against Ukraine is low. But he identifies other nuclear options for Russia such as

a demonstration blast in remote areas of Russia. Such an action would be intended and likely to have a powerful psychological effect not easily mollified by official US reassurances to NATO allies and other countries. But such a gambit would also involve and/or provoke abruptly heightened levels of strategic force readiness on both sides of today’s strategic divide, and this would be uniquely dangerous.

Conetta also notes that Russia’s nuclear doctrine has shifted over the last year, and the Kremlin may well redefine what constitutes an existential threat to Russia to allow for the use of nuclear weapons. In the end, he concludes that “although the probability of a big power nuclear clash of any magnitude over Ukraine remains low, it would be irrational and irresponsible to act as though we can roll the nuclear dice and never come up ‘snake eyes.’”

Masha Gessen, the prolific critic of Putin, has also sounded a warning about Putin’s willingness to go nuclear. She grounds these fears in an analysis of Putin himself.

He believes that, on the one hand, he is facing down an existential threat to Russia and, on the other, that Western nations don’t have the strength of their convictions to retaliate if it comes to nukes. Any small sign of a crack in the Western consensus—be it French President Emmanuel Macron pressuring Ukraine to enter peace negotiations, or the House Republican leader Kevin McCarthy criticizing what he sees as unconditional aid to Ukraine—bolsters Putin’s certainty.

She concludes that only the threat of massive conventional retaliation by NATO and the West stays Putin’s hand. Also note Gessen’s terrible irony: the more that peace activists call for negotiations to reduce the risk of nuclear war, the more Putin will interpret the successful pick-up of that message as a sign that he can use nukes with impunity.

The Politics of Good and Evil

Superpowers that do evil should not be allowed to continue doing so simply because they possess nuclear weapons. Those who have resisted the spread of U.S. empire in Asia, Africa, and Latin America didn’t lay down their arms or stop protests in the streets because of the threat that Washington would use nuclear weapons. They confronted the evil of U.S. occupation and, in many cases, they succeeded.

Oh, but Putin is different, you might say. The Russian leader is making actual nuclear threats. He is promising to move nukes closer to the front (as opposed to the United States, which hasn’t moved its 100 or so tactical nukes from storage facilities in Western Europe). He is a mad man and will stop at nothing to create his “Russian world” out of territory absorbed from countries on Russia’s borders.

But as should be clear from the above, Putin has stopped short at several junctures. He has committed war crimes, to be sure. But so far he has not listened to the right-wing critics at home who urge him to fight a total war in Ukraine. He hasn’t listened to them because the Russian military doesn’t have sufficient capacity and because he fears the consequences of such a dramatic escalation.

It should go without saying that the United States must keep open lines of communication with Moscow and pursue arms control negotiations. The Biden administration should be careful to focus on the importance of defending Ukraine and avoid any statements that call into question the existential status of Russia or Putin’s regime. Direct NATO involvement in the conflict, which could indeed trigger a world war, should be avoided.

So, it’s up to Ukraine—not only to defend itself but to prevent Putin from using nuclear blackmail to achieve his ends. That might also mean, paradoxically, that it will be up to Ukraine to show restraint in defeating Russia to prevent Putin from using actual nukes to forestall his own end. Ukraine thus must fight against two evils simultaneously: the reality of Putin and the possibility of nuclear war.

John Feffer

John Feffer is the director of Foreign Policy In Focus. His latest book is Right Across the World: The Global Networking of the Far-Right and the Left Response.

FPIF : IRAQ, UKRAINE, AND A WORLD WITHOUT ACCOUNTABILITY If the U.S. wants the ICC to prosecute Russia for its many crimes in Ukraine, Washington should join the court too — and receive its judgment. By Farrah Hassen | March 29, 2023

 IRAQ, UKRAINE, AND A WORLD WITHOUT ACCOUNTABILITY

If the U.S. wants the ICC to prosecute Russia for its many crimes in Ukraine, Washington should join the court too — and receive its judgment.

By Farrah Hassen | March 29, 2023

The wars in Iraq and Ukraine may differ, but both speak to the tragic realities of war. They also make a strong case for strengthening the rule of law instead of undermining it through flimsy pretexts for endless militarism.

Like the 2003 U.S. war in Iraq, which marked its 20th anniversary this March, Russia’s year-long war on Ukraine is an act of aggression in blatant violation of international law.

The International Criminal Court (ICC) has sought to hold Russian President Vladimir Putin accountable for abuses committed during the war. On March 17, it issued an arrest warrant for Putin for the abduction and deportation of Ukrainian children to Russia. Although Russia is not a member of the ICC, human rights groups hailed the warrant as a step towards justice.

President Biden called the court’s decision “justified,” but acknowledged that the U.S. isn’t a member of the ICC either. It is important to see the U.S. support justice and accountability for Ukrainian victims. This should be extended to all victims of wars, including in Iraq.

That illegal war killed upwards of a million Iraqis, displaced over 9 million from their homes, and destroyed the country’s infrastructure. Terrorist groups, including ISIL, emerged in response to the invasion and have continued to unleash violence. Political divisions plague the country, Iraqis continue to struggle, and the U.S. has troops there even today.

The glaring lack of accountability for our government’s actions in Iraq compromises America’s authority to meaningfully promote human rights, justice, and the rule of law elsewhere — including in Ukraine.

The invasion of Iraq directly contravened the UN Charter’s articles prohibiting military intervention and the use of force in international relations. The U.S. sent 130,000 troops to overthrow Iraq’s government, without UN authorization and under the fraudulent pretext that the country was amassing weapons of mass destruction.

Widespread human rights violations emerged from the invasion and occupation. Among them, tens of thousands of Iraqis were arrested and detained by U.S. personnel. The majority were innocent civilians and many were abused.

Photos from the Abu Ghraib prison scandal in April 2004 revealed horrifying, unlawful acts of torture. Naked men were leashed like dogs, electrocuted, and beaten. This barbarism was part of a broader post 9/11 torture network that spanned secret CIA prisons in Afghanistan and Europe to the notorious U.S. prison at Guantánamo Bay, Cuba.

Years later, WikiLeaks published classified U.S. government records that included evidence of other war crimes in Iraq. In the “Collateral Murder” video published in April 2010, shocking footage from 2007 showed U.S. helicopter gunships killing civilians and two Reuters journalists in Baghdad.

No U.S. government officials who created, implemented, or oversaw torture have been held accountable. They have not received court indictments, arrest warrants, sanctions, or professional ramifications. Justice, including in the form of reparations, still evades the survivors of torture at Abu Ghraib and other Iraqis harmed by the war.

And no high-level U.S. officials faced consequences for waging a war that killed nearly 4,600 U.S. soldiers and that continues to cost our government trillions.

The only ones to face charges over the WikiLeaks revelations were the people who publicized them. Former U.S. Army intelligence analyst Chelsea Manning, who provided hundreds of thousands of military and diplomatic records to WikiLeaks in 2010, was prosecuted, imprisoned, and later pardoned by President Obama. WikiLeaks founder Julian Assange, who published the evidence that helped uncover illegal state conduct, faces up to 175 years in a U.S. maximum security prison should he lose his ongoing extradition fight.

If the U.S. is serious about enforcing international law, it must right its own wrongs in Iraq and elsewhere.

Joining the ICC would be a positive step.

On previous occasions, the U.S. has undermined the court, such as by derailing its investigation of U.S. crimes committed in Afghanistan. More recently, Pentagon officials stymied efforts to share U.S.-gathered evidence of Russian crimes with the ICC due to reported concerns that it could one day set the stage for prosecuting Americans.

This highly selective “rule of law” contradicts its very definition and breeds a culture of impunity. As Russia’s actions demonstrate, these double standards weaken the rule of law and human rights around the globe.

A long overdue reckoning with Iraq is also important for Americans who were lied into this devastating war in order to ensure that nothing like this ever happens again.

In the meantime, Iraqis still wait for accountability. Like all victims of war, they deserve justice.

No one is above the law.

Farrah Hassen

Farrah Hassen, J.D., is a writer, policy analyst, and adjunct professor in the Department of Political Science at Cal Poly Pomona.

FPIF . REFLECTING ON RUSSIA’S WAR CRIMES IN UKRAINE, 20 YEARS AFTER THE U.S. INVADED IRAQ By Phyllis Bennis | March 29, 2023

REFLECTING ON RUSSIA’S WAR CRIMES IN UKRAINE, 20 YEARS AFTER THE U.S. INVADED IRAQ

Washington has tried to replace international law with a vague "rules-based order" that seemingly only other countries can violate. Ukrainians and Iraqis deserve better.

By Phyllis Bennis | March 29, 2023

Originally published in Common Dreams.

This March marked the 20th anniversary of the U.S. invasion and occupation of Iraq. The war left at least 800,000 to 1.1 million Iraqis dead, and certainly many more injured, maimed, and permanently displaced.

The invasion and subsequent military occupation destroyed Iraq’s once-modern infrastructure and much of its environment while shredding the country’s social fabric. The war gave rise to religious and ethnic divides, created unfathomable levels of corruption, left a legacy of sectarian militias and terrorist organizations including ISIS. War crimes by the U.S. military and private contractors, even beyond the initial crime of aggression, exploded from Abu Ghraib to Fallujah to Nisour Square and beyond.

This week the International Criminal Court in The Hague announced its war crimes indictment of the president of the country whose troops had invaded and occupied another country, and committed horrific war crimes. While we continue to call for an immediate ceasefire and negotiations to end the war in Ukraine, we know that justice for war crimes—in all wars—remains an urgent necessity. The indictment of President Vladimir Putin is appropriate as the invasion of Ukraine was illegal and Russia’s ongoing assault and occupation of Ukrainian territory is a clear violation of international humanitarian law. U.S. war criminals are missing from the same dock.

So it is also true that the president, as well as the vice-president, the secretary of defense (now dead), and many more high-ranking officials of the United States should have been—and still should be—indicted for war crimes. The invasion of Iraq was, like Ukraine, illegal. The U.S. occupation was a violation of international humanitarian law. And U.S. troops committed horrific and well-documented war crimes.

Moscow’s clearly illegal Ukraine war is condemned by the United States primarily as a violation of Washington’s self-defined “rules-based order.” Accountability is demanded, and the United States even grants the ICC, albeit grudgingly, some level of legitimacy to impose accountability on Putin and other Russian officials. We have witnessed the possibility of Putin being held to account by the Court greeted with cheers in Washington and in the media across the United States.

President Biden and other officials are among those cheering Putin’s indictment, despite the longstanding U.S. refusal to provide intelligence or other assistance to the ICC regarding war crimes in Ukraine or elsewhere. Indeed they recognize supporting the ICC would set a precedent for ICC jurisdiction over U.S. troops and political leaders responsible for Iraq and other war crimes in so many places in the world—an accountability long rejected in Washington.

War Crime Charges for Them, But Never for Us

It’s not new for Washington to claim to support the ICC in principle even while refusing to actually recognize its jurisdiction. The United States was among the seven outlier countries—joining Israel, China, Iraq, Libya, Qatar and Yemen—that voted against the Rome Treaty which established the International Criminal Court in 1998.

Russia signed the Treaty in 2000, but withdrew its signature in 2016, two years after its intervention in Ukraine and annexation of Crimea. Washington, finally, also signed on in 2000 but never ratified the Treaty, and withdrew its signature even before Russia did. In 2002 then-President George W. Bush, already mobilizing for his illegal war in Iraq, instructed his UN ambassador John Bolton to “unsign” the treaty. Three years later Bush signed what became known as the “Invade The Hague” Act, authorizing the U.S. military to use whatever force necessary to free any U.S. citizen ever arrested by the International Criminal Court.

This kind of victor’s justice—a longstanding component of American exceptionalism—is an old story in U.S. politics and historiography since World War II. But it has become less hidden and more explicit in the last two decades as the Global War on Terror reshaped so much of the world. In even more recent years, the elusive “rules-based order” has replaced international law as the basis (albeit aspirational, if nothing else) of global legitimacy for Washington. And some of that shift goes back to the war in Iraq.

What waging an illegal war necessitates

In 2002 and early 2003, as the United States and its British backers prepared to invade Iraq based on lies about non-existent weapons of mass destruction, imaginary links between al Qaeda and Iraq’s government, claims of bringing “democracy” to Iraq and more, they pushed for a UN Security Council resolution that would explicitly authorize their war. Earlier resolutions threatening Iraq were not passed under Chapter VII of the UN Charter, a prerequisite for legalizing an act of war. At the time, 11 of the 15 UNSC members refused to pass a second resolution. Without Council authority, the U.S. and UK launched their war in clear violation of international law. The UN’s then-Secretary General Kofi Annan would eventually acknowledge that the war was illegal.

But that finding was based on actual international law—the treaties, conventions, and covenants that were written, agreed to, signed, and ratified by governments committed to upholding their terms. Those included the UN Charter, the Geneva and Hague Conventions, prohibitions on producing or using specific kinds of weapons (now finally including nuclear weapons), and much more. The U.S. war in Iraq was illegal because the invasion violated Articles 39 and 51 of the UN Charter; the use of white phosphorous as a weapon violated the Chemical Weapons Convention; the torture of prisoners at Abu Ghraib and elsewhere and a host of other military actions all violated many of the Geneva Conventions; and more. When U.S. officials and pundits accuse other governments of rejecting the never-defined, never written-down, never agreed-to “rules-based order,” there is no identifiable law or rule being referenced, it is simply a statement that the U.S. doesn’t like the way another government operates.

The “rules-based order” of the 21st century is the order defined and imposed by the United States and its closest allies.

Washington’s clearly illegal Iraq war didn’t violate some amorphous “rules-based order.” It violated long-established and specific principles of international law. The war’s violations of actual international law were widely known and discussed but largely ignored by officials and mainstream media, and U.S. accountability for war crimes has never been on the table. No U.S. officials have been held accountable for their crimes, no U.S. reparations for the massive destruction the war wrought on Iraq and Iraqis have been offered, and no apologies have been made.

The comparison here is not a case of “what-about-ism” aimed at protecting Russia. There is little doubt that Russia has committed war crimes in Ukraine and there should be accountability for those crimes. It is also undoubtedly true that authoritarian and aggressive leaders around the world have relied on the impunity enjoyed by George W. Bush, Dick Cheney, Donald Rumsfeld, and others responsible for U.S. war crimes in Iraq, as a green light for their own crimes. If U.S. war criminals had been held to serious account, it is likely that some of the other militaristic authoritarians around the world, perhaps including Vladimir Putin, might have held back from some of their illegal actions.

Right now most countries around the world, including those critical of U.S./NATO provocations of Russia over the last decades, are critical of Russia’s invasion of Ukraine. Most European and other U.S. allies, some for their own reasons, others under U.S. pressure, toe the U.S./NATO line. But many other governments, while appropriately refusing to support Washington’s sanctions and dangerous escalation of this terrible war, are reluctant even to denounce the Russian invasion, because they resent U.S. hypocrisy and double standards. Accountability doesn’t happen on its own, it must be fought for—in all cases, including that of the United States.

The refusal of sequential U.S. governments to hold their predecessors accountable for war crimes in Iraq, indeed their continuation of many of those criminal actions, has had serious consequences for Iraq and for the world. The best way to help the people of Ukraine and the people of Iraq is to hold the United States accountable for its crimes too.

Phyllis Bennis

Phyllis Bennis directs the New Internationalism Project at the Institute for Policy Studies.