Thursday22 August 2019 ★ FINANCIAL TIMES 9

Opinion

C

ui bono? When the eco-

nomic cycle does its inexo-

rable work, and a recession

strikes the US, which politi-

cal force will benefit? What

the question lacks in taste, it more than

makes up for in importance.

It is also a nightmare to answer. To

understand the opacity of the link

between economics and politics, recall

the last crash. A fiasco that was made in

the private sector and eased by the state

should have been the left’s biggest open-

ing since the Great Depression elevated

Franklin Roosevelt. Barack Obama was

duly elected president. John Maynard

Keynes becamea pop-culture iconfrom

beyond the grave. But the moment fiz-

zled. The lasting products of the crash

were instead the Tea Party movement

and the presidency of Donald Trump.

Going into the next recession, the

principal forces in the US are his popu-

list right, the populist left of senators

Bernie Sanders and Elizabeth Warren

and — as frail-seemingas its champion,

Joe Biden — the old centre.

All three have reasons to think a

recession would leave them ascendant.

The populist right can stoke a siege

mentality against a complacent Federal

Reserve and a beggar-thy-neighbour

China. The recession will also take place

in a country whose foreign-born popu-

lation is touching its historic peak: no

demagogue of any talent could fail to

exploit the likely schisms. The belief

that Mr Trump cannot survive a reces-

sion before November 2020 is probably

right. But the question here is not which

person wins one election. It is which

idea rules the decade post-recession. In

times of scarcity, when groups vie over

less and less, Trumpism can surge long

after its eponym falters.

Its challenge will be disavowing culpa-

bility. In 2016, the populist right com-

prised untainted outsiders. At the next

recession, it will have been at least four

years in government. Through the tar-

iffs it has imposed, the Trump adminis-

tration will have had a hand in the

downturn. Populism is always in its ele-

mentin opposition, spooking the elite

into concessions without braving the

reputational wear and tear of high

office. The worst thing that ever befell it

might turn out to be power.

All of which should encourage the

centre. A recession — the softening of

which is a technocratic art — might

make voters glad of a dispassionate

expert class. Some boom-era tenets,

including free trade, have become more

popular, not less, during the Trump

years. The centre also answers to the

latent desire for a quiet life. A rare

zinger in the Democrats’ wonkish

primary race has come from the

moderate senator for Colorado. “If you

elect me president,” said Michael

Bennet, “I promise you won’t have to

think about me for two weeks at a time.”

Such is the mood of millions: exhaus-

tion, not hunger for an equal and

opposite reaction to Mr Trump.

Still, there is something fanciful about

a Bourbon restoration for the Bilderberg

classes, so soon after their fall. Mr Biden

comes across as a viable winner in 2020,

but also as a holding pattern: a one-term

breather while Americans decide on the

way of the future.

A process of elimination seems to

leave the populist left as the victor of the

next recession. But there is much more

in its favour than that. Polls suggest that

fewer and fewer Americans see the mar-

ket as a kind of Revealed Truth, in which

the rich and poor both deserve their

lots. Most now recognise dumb luck and

structural factors beyond individual

control. Government-funded single-

payer healthcareis popular and so is a

wealth tax. Then there is Policy Mood, a

composite of public attitudes to various

questions. Its score for 2018 was the

most “liberal” (in the US sense) ever

recorded. Its highest previous reading

was in 1961, which portended Lyndon B

Johnson’s Great Society.

And this, remember, is before the

coming of the recession, which is likely

to worsen inequality in a country that is

already nearer Chile than Germany in

the Gini coefficient. Wall Street Demo-

crats who hate Ms Warren might won-

der if the choice is between her control-

led redistribution now, or a larger reck-

oning with the public down the line.

Moderation to the point of tedium is

still the Democrats’ surest way to vic-

tory next year. But if the question is

what longer-lasting energies will be

released by a recession, it is hard to look

outside the left. It does not just have

existing trends of opinion on its side, it

has a relatively clean skin. It has not pre-

sided over a downturn in recent mem-

ory. And none of this reckons with the

organisational intensity of people who

feel cheated out of what should have

been “their” era after 2008. Precisely

because the left failed to win the last

crisis, it is unlikely to miss out again.

[email protected]

The question here is not

which person wins one

election. It is which idea

will rule the next decade

Who benefits from the next recession?

cause and increased the danger of China

intervening by sending military police

across the border. But businesses have

collective strength. David Webb, a Hong

Kong corporate governance activist,

says Cathay could have “called China’s

bluff” after it threatened to block flights

over the mainland. That might have

deterred foreign investment in Hong

Kong and scared the wealthy Chinese

who keep family offices there.

Those with a big stake in Hong Kong’s

future need to do more than fall meekly

in line with China and become Beijing’s

enforcers. John Slosar, Cathay chair-

man, was right to insist (before Merlin

Swire, Swire’s chief executive, was repri-

manded by China’s aviation regulator)

that the airline “wouldn’t dream of tell-

ing [staff] what they have to think”.

Hong Kong was always a balancing act

and its equilibrium requires financial

and corporate independence, married

to China’s market. Its business leaders

should learn from Mr Li.

[email protected]

of the revenues of CK Hutchison Hold-

ings, another Li family holding com-

pany, come from Europe.

It helps to be Chinese; history is an

obstacle to defying China for groups

such as Swire and HSBC, whose original

prospectus promised a Hong Kong bank

“run on sound Scottish banking princi-

ples”. A UK company that makes trou-

ble is liable to be dismissed as colonial-

ist, although rights such as freedom of

assembly are in Hong Kong’s basic law.

China’s government and media are

also practised at encouraging outcries

on social media against foreign slights

and consumer boycotts. Liu Wen, a

Chinese model, resigned as a brand

ambassador for Coach last week after

it labelled Taiwan and Hong Kong

as countries on T-shirts. “I love my

motherland and resolutely safeguard

China’s sovereignty!” she wrote.

It is fair for companies to condemn

violence and call for order and negotia-

tions to settle the dispute. The outbreak

of brutality among protesters at Hong

Kong’s airport last weekdamaged the

Kong auditors to “fire employees found

to have the wrong stance”. Deloitte

showed some pluck by specifyingthat

“we respect the right of individuals to

peacefully express their views”.

Mr Li artfully straddled the line

byplacing advertisementsin papers last

week, signed “a Hong Kong citizen”. One

included a line from a Tang dynasty

poem about an empress who killed her

children: “The melon of Huangtai can-

not bear the picking again.”

That could be taken either as an

admonishment against violence, or as a

jab at China; the latter interpretation

made Mr Li popular among protesters.

He can afford ambiguity: having taken

control in 1979 of Hutchison, Swire’s old

rival, he has hedged his bets. Nearly half

protests. Nor to the luxury compa-

nies Coachand Versace, which had

to apologisefor suggesting that Hong

Kong is a country, and not a part of

China. “I aim to be strong enough to be

respected, if not beloved,” declaredJohn

Samuel Swire, who brought his family’s

firm to Shanghai and Hong Kong in the

19th century. But China’s use of multi-

nationals to enforce party discipline on

rebellious Hong Kongers is in danger of

making them neither.

Companies such as Cathay Pacific,

70 per cent of whose flights overfly the

mainland, feel unable to resist China’s

intolerance of any challenge to sover-

eignty. But it is humiliating — one point

of the open obeisance that China

requires — and will hurt elsewhere.

The protests, which started in opposi-

tion to an ill-judged extradition law and

have become a wider call for greater

democracy and civil rights, are a turning

point for businesses. Hong Kong’s “one

country, two systems” offered both free-

dom and access to China; in future, they

may have to choose.

“It is a very dangerous precedent, and

shareholders may ask why they are

kowtowing to Beijing,” says Willy Lam, a

scholar at the Chinese University of

Hong Kong. It is hard to proclaim a

social conscience in one place and fail to

stand up for staff in another.

China and its state media have made

little effort to distinguish between vio-

lence and peaceful protest. The Global

Times, an offshoot of People’s Daily, last

weekrelayed callsfor the big four Hong

L

i Ka-shing, the 91-year-old

Hong Kong tycoon, is a

veteran of communicating

with symbols and allusions.

So when his property

company CK Asset Holdings

acquiresGreene King, the largest

listedUK pub company, for £4.6bn, we

should take note.

The deal followed weekend protests

by an estimated 1.7m people in Hong

Kong against China’s grip on the former

UK colony. Mr Li, who has been excori-

atedin the People’s Dailyfor diversify-

ing out of property in mainland China

and Hong Kong into economies includ-

ing the UK, is clearly unbowed.

The same cannot be said of Swire, the

trading company established in Hong

Kong by a Liverpool textile firm in 1870.

Chinese pressure onCathay Pacific,

the airline it controls, over the role of

employees in protests, last weekforced

the replacementof Rupert Hogg,

Cathay’s chief executive.

Neither does it apply toauditors such

asPwC, whose Hong Kong partners

issued acontrite statementafter Chi-

nese outrage at employees of large

accounting firms publicly backing the

Hong Kong

firms need to

stay strong

Equilibrium depends on

financial and corporate

independence, married

to China’s market

BUSINESS

John

Gapper

W

e live on a dying planet

surrounded by desper-

ate inequality.Corpo-

rate leaders like to say

they are working to

solve the problems: just this week one of

the US’s largest business groups urged

companies toconsider the environment

and workers’ wellbeing alongside their

pursuit of profits. But how many of

them are really doing everything within

their power to change the status quo?

Activists such as teenager Greta

Thunberg have catapulted the climate

emergency on to centre stage. And

global goals set by the UN give us until

2030 to end poverty, fight inequality

and stop climate change.It is not sur-

prising that business leaders have

promisedto rethink their roles and con-

tribution to society, and incorporate

them into a new “business purpose”.

This is progress. But matchingprom-

iseswith meaningful deeds will be

harder. Our latestResponsible Business

Trackerof UK companies found that we

are in danger of falling into a new era of

“purpose-washing”: 86 per cent of those

surveyed said they have a purpose state-

ment, but only17 per cent have a plan to

make sure it’s practised at every level of

the organisation. That gap is too big. If

purpose is stated but not carried out, it

is not only delusional, but diversionary.

The key to making sure business

walks the talk is understanding what

changes behaviour. Businesses are run

and powered by people, so it stands to

reason that the things that lead us to

evolve as individuals also drive

improvements in businesses.When I

think about the times I have made last-

ingchanges, guilt has often provided the

push I’ve needed. Using guilt to deter

people and businesses from harming

themselves or others canfast-track

responsibility right to the heart of busi-

ness practice. But guilt is not enough.

Take zero-hours contracts as an

example. These contracts, which tie up

workers without guaranteeing them

any pay, are still rife despite ample

evidence of the negative impact they

have on employees. Many companies

continue to offer the legal minimum

wage instead of the living wage that

workers need to do more than survive.

And rising hourly pay is oftennot

matchedby increased weekly pay. None

of this will address inequality.

For their part, consumers are bom-

barded with requests toswitch to prod-

ucts and services that are better for

them and the planet, but habit, conven-

ience and self-interest often come first.

We can also feel powerless to make any

real difference as individuals —what is

the point of changing if we do not know

how and no one else is doing it?

It is easy to turn a blind eye to the

effects of our actions if we think there is

nothing we can do. But there is a better

w ay.Guilt on its ownis of little use. Guilt

combined with practical solutions can

serve as the missing stepping stone

between what we say we do and what we

actually do. It pushes companies to

actuallytackle societal problems.

To create meaningfulchange, busi-

ness leaders must not only be shown the

negative impact of their actions to

create the necessary foundation of guilt

(seeing is believing, after all), they must

also be shown how they cancollectively

solveproblems.

Businesses that embrace guilt, seek

solutions and understand that their

success is inextricably linked to soci-

ety’s prosperity, will ultimately winout.

For example, Boots, the UK pharmacy

chain, not only wants to “help peo-

ple... live healthier and happier lives”

but also invests in partnerships that

improve cancer and dementia care. And

NEMI Teas, which believes “we are born

free and equal”, employs refugees to run

tea stalls at London markets, allowing

them to gain confidence and work skills.

Other business leaders must make

decisionsthat will make their children

proud. Acknowledge that permanent

nagging. Listen to your conscience: guilt

is good. What keeps you awake you at

night could very well save us all.

The writer is chief executive of Business in

the Community

Guilt about

climate change

is good for

corporate chiefs

If best intentions are stated

but not carried out, it’s

not only delusional,

but diversionary

T

he global economy is slow-

ing, US business invest-

ment has stalled and the

yield curve, which reflects

market expectations of

future interest rates,has inverted— a

quirk that preceded previous reces-

sions. How should monetary policy

respond?

The Federal Open Market Commit-

tee, of which I am a participant, will

consider this question at our September

meeting. Absent some surprise reversal

in these economic developments, I will

argue that we should not only cut the

federal funds rate, but that we should

also use forward guidance to provide

even more of a boost to the economy

than a rate cut alone can deliver.

The Federal Reserve’s traditional

monetary policy tool is the federal funds

rate — an overnight interest rate that

banks charge each other. Consumers

and businesses, by contrast, care about

long-term rates, because when a family

buys a house or a business builds a

factory, they take out a long-term loan.

For most us, it is that longer interest

rate that counts. But, because long-term

loans are like a series of short-term

loans, movements in the overnight rate

(especially those seen as long-lasting)

tend to move long-term rates. So by

adjusting the overnight rate, the Fed can

influence long-term rates and affect

investment in the real economy.

After the Fed lowered the federal

funds rate to near zero during the finan-

cial crisis, many people asked if it had

left itself without ammunition; over-

night rates were then about as low as

they could go.

That is when the Fed turned to two

new tools, quantitative easing and

forward guidance, to provide more

stimulus. By buying long-term treasury

bonds and mortgage-backed securities

in its quantitative easing programmes,

the Fed pushed down long-term rates,

which provided more stimulus.

Forward guidance can also provide

stimulus by signalling that overnight

rates will be low in the future. For exam-

ple, the federal funds rate effectively

hit zero in late 2008, but the rate on

a 10-year treasury bond stood at 3.5 per

cent for much of 2009, in part because

investors assumed rates would pick

back up.

If the Fed had made a firm commit-

ment to keep overnight rates at zero for

the next 10 years, the 10-year treasury

rate would likely have been close to

zero. So the Fed can also influence long-

term rates by giving guidance about the

future path of their short-term equiva-

lents. The firmer the Fed’s commit-

ment, the more influence it can have.

Forward guidance was a new and

untested tool during the financial crisis

so the Fed implemented it conser-

vatively. Critics of these tools feared

high inflation and a devalued

currency but such risks did not

materialise.

The question now is: “When should

we use them?”. Conventional wisdom

says only after the federal funds rate has

been lowered to zero. Once the tradi-

tional tools are worn out, turn to the

new. But this view is mistaken; forward

guidance should be used now, before the

federal funds ratereturns to zero.

If a central bank cuts rates to zero in

response to a downturn and then

announces that it plans to keep rates

low, that can actually be perceived as a

sign of weakness rather than strength.

Market participants understand it is the

economy keeping the rate low, not the

central bank choosing freely. It is like

driving a car into a ditch and then

declaring you are staying there by

choice. The reality is you can’t get out. It

is better to avoid it in the first place.

If the global economy continues to

weakenand the trade war between the

US and China intensifies, the Fed could

find itself cutting rates aggressively. It

would be better to deploy guidance now

in an effort to avoid hitting zero.

What would such guidance look like?

At a minimum, we should commit to

not raising rates again until core infla-

tion returns to our 2 per cent target on

a sustained basis.

Since cutting rates to near zero in

2008, the Fed has consistently over-

estimated the speed of inflation’s return

to that target and repeatedly signalled

that rates would go up quickly. For

example, the median forecast in

December 2014 showed rates rising to

3.625 per cent by 2017, far higher than

markets expected or in fact happened.

Although the Fed didn’t realise it at

the time, by sending a message suggest-

ing rate increases, this forward guidance

was contractionary rather than stimula-

tive. Announcing a commitment not to

raise rates until inflation returns to tar-

get would prevent us from making that

mistake again. What is more, if we take

the risk of premature rate increases off

the table, lower long-term rates should

provide support to the economy.

If a recession is coming we may end up

with rates back at zero, but we should

take action now to try to avoid the reces-

sion and the ditch.

The writer is president of the Federal

Reserve Bank of Minneapolis

At a minimum, we should

commit to not raising rates

until core inflation returns

to our 2 per cent target

The Fed should use forward guidance more freely

Amanda

Mackenzie

AMERICA

Janan

Ganesh

Neel

Kashkari

                   

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