The British and Dutch governments are seeking agreement with the Icelandic government for the repayment of debts, which now amount to 50% of Icelandic GDP, owed to British and Dutch savers in now collapsed Icelandic banks. If we attempt to see things from the Icelandic perspective, this observation from Wolf is particularly striking: “In the UK context, this would be equivalent to a demand for £700bn. It is not hard to imagine how far Mr Brown would get with a suggestion that the UK should accept such a debt to refund depositors in foreign branches of bankrupt UK banks.”

We most probably do not have to fear the rise of Nazism in Iceland, (though, Icelanders do have unnecessary misery and Brits needlessly lost goodwill to fear), but Wolf’s analysis seems as persuasive and prescient as J. M. Keynes’ The Economic Consequences of the Peace proved to be on the Versailles Conference.

“Do Iceland’s taxpayers have a moral obligation to pay this loan? My view is: no. The delusion that finance was the path to riches was propounded by countries that should have known far better. I cannot blame Icelanders for succumbing. I certainly do not want generations of Icelanders to bear the cost.”

Iceland has many things going for it. However, not so many that more measured approaches from the British and Dutch governments could not considerably improve the prospects of Icelanders for many years to come.

“The final and, in truth, most important question is whether these demands are reasonable. After all, in every civilised country it has long been accepted that there is a limit to the pursuit of any debts. That is why we have introduced limited liability and abolished debtors’ prisons. Asking a people to transfer as much as 50 per cent of GDP, plus interest, via a sustained current account surplus is extraordinarily onerous.”

Not only is it extraordinarily onerous but it is only justified if we accept that several generations or more of Icelanders should pay the full price for the follies of a small Icelandic elite. What would the likes of the Labour Party argue in similar circumstances in the UK? Surely, we’d argue in favour of the many and not the few? So, why should we think any differently about an event in Iceland?

Let’s take a deep breath, step back and extend a modicum of decency to a fundamentally decent people, who, incidentally, were amongst the first to get aid to Haiti this week. If Icelanders can do the right thing by Haiti, Brits can do the right thing by Iceland.

Disappointed and, according to Mark Lynas, insulted by the Chinese in Copenhagen.  A Health Care Bill that isn’t yet on the statute; is much delayed on his original timetable; and, by his own admission, is only “nine-tenths of a loaf” - some would say that half a loaf is nearer the mark and it comes with lashings of pork barrel whatever way you look at it. An Afghan strategy that even he doesn’t seem wholly convinced by and the backdrop to which Andrew Sullivan commented upon by saying:

“Obama arrived in China last month as a fiscal supplicant, not the leader of the free world. He cannot corner the Iranian regime without Russian or Chinese support. He cannot even get Israel, a country receiving $3 billion a year in aid and protected by America’s veto at the United Nations, simply to cease its construction of settlements in East Jerusalem or the West Bank.”

All of which simply serves to illustrate my point: How devoid of power the most powerful can be. That’s not to excuse any disappointments that President Obama may have caused or to defend his record (though, there is much more to defend than the increasingly naysayer conventional wisdom suggests). It is simply to place his presidency in context.

This is a context in which his power is more obviously finite and constrained than has been the case for most modern US presidents. Internationally, this is the consequence of the “unipolar moment”, first proclaimed, I think, by Charles Krauthammer in 1990, waning (or, perhaps, being more obviously exposed as the hubristic delusion it always was). Domestically, this is the bitter fruit of what appears to Paul Krugman to be an increasingly dysfunctional Senate. This is a dysfunctionality that means that the Democrats control the presidency and both Houses but are still held to ransom by (dilute to taste) filibustering, partisan, pork barrel-seeking Republicans.

The international dimensions of this are well illustrated by Philip Bobbitt.

“What if Iran simply agrees to limited inspections, and continues enrichment to the point where weapons-grade nuclear material is created? What then? … Israel has resumed the construction of settlements in the West Bank, and it seems clear that Abbas cannot sustain domestic support in the face of the challenge from Hamas if he goes back to the negotiating table without even a temporary freeze on settlement expansion. Obama has little leverage on this issue—as his predecessors also found—but has committed himself to the proposition that “talks must begin and begin soon.” Or what? … Having previously announced it would not renew talks in the six-party format, North Korea has now indicated to the Chinese that it would re-engage in that forum, provided the US simultaneously opens bilateral talks. The US has insisted, quite sensibly, that regional multilateralism is the best way forward. But what if North Korea continues to refuse?”

The growing worry is that the Iranians, Israelis and North Koreans – not to mention the Chinese, Russians, the Taliban and others – have concluded that “nothing much” is the answer to every “What then?” In other words, as the Economist notes:

“The doubters argue that, however decent and articulate, Mr Obama is gaining a reputation as someone who can be pushed around. This month, after the president pandered to China by refusing to meet the Dalai Lama, China pushed for more by banning questions at his Beijing press conference with Hu Jintao, its president. When Mr Obama demanded that Israel stop all work on its settlements in the occupied territories, Binyamin Netanyahu, its prime minister, defied him and still, staggeringly, won praise from Hillary Clinton.”

It is even said that this praise from Clinton lays the groundwork for her to run against Obama for the Democratic presidential nomination in 2012. This argument goes that she will need an issue on which to split with Obama to do so and support for Israel would fit this bill. It is to be hoped that this argument is nonsense. But the mere suggestion that the President does not command the absolute and complete loyalty of all of his team implies weakness in a manner as profound as the swipes and pushed envelopes that have come his way via China, Israel et al.

The counter to this line of argument is also provided by the Economist:

“Mr Obama has pulled off the urgent tasks of starting to withdraw troops from Iraq and resetting America’s dysfunctional relations with Russia. He has boosted the G20 as a new global forum. This week Israel announced a partial settlement freeze. With health-care reform under his belt, he will soon be able to turn to world affairs with his status enhanced. Besides, you could hardly accuse Mr Obama of timidity. In three speeches in Prague, Cairo and Accra, he set out a new foreign policy that rejects the Manichean view of his predecessor. He means to negotiate deep cuts in nuclear weapons, make peace between Arabs and Jews, engage Iran, heal the climate and establish America as the strongest and most upright pole of a multipolar world. Yes, this work lies ahead, but how much can you ask in a year of war and recession?”

Health care reform is, just about, under his belt and it is hard to argue with the view of the Obama camp that this reform needed to be taken on in the first year of his presidency before mid-term elections which are likely to further undermine his ability to impose his will upon Congress. His presidency moves into a new phase with this reform behind him. However, perhaps, there are lessons to be learned for this next phase from the protracted way in which this reform was secured.

While the dysfunctionality of the Senate bemoaned by Krugman may make it all the harder for Obama’s will to prevail, it is important, no matter how great this dysfunctionality, that Obama exerts a will. In other words, he needs to lead. The tactics of how he does so can be debated, but the President does need to show genuine leadership. As Clive Crook writes:

“Mr Obama promised to strive for consensus. On issues such as energy policy, healthcare, education and immigration, there is no reason why moderates on both sides cannot make common cause. That is something many Americans long for. It was the great hope independents had of Mr Obama. In his first year, he rarely even tried. He simply chose not to exercise this kind of leadership.”

I must confess that I am both surprised and disappointed by the absence of such leadership. I anticipated that it would be forged on the radical centre (or center). Crook is right to worry that the absence of leadership that works towards such radicalism threatens “a drubbing in 2010 that will do for Mr Obama’s agenda what the wipe-out of 1994 did for Bill Clinton’s”.

While a drubbing can be averted, it is likely that the mid-terms will weaken the Democrats in Washington. This underlines the importance of strong leadership from the centre, of the kind which Crook described thus:

“On health, on energy, on public spending, independent voters want him to exercise centrist leadership, as he promised he would. Can’t he even pretend? For the sake of his Democratic majorities, he had better show voters he is listening, even if his allies in Congress are not.”

But there are plenty of willing allies for Obama in Congress who want the Democrats to behave in this way. A key example being Mark Warner, excellently profiled in the Washington Post this week. That he defines his philosophy as “radical centrism” should be a massive hint that this is the kind of Democratic Senator that Obama needs to work with and through to build consensus, bi-partisan if at all possible, for his agenda. It may be indicative of where things have gone wrong for the Democrats and Obama in the past year that the sense that Warner feels a little left out in the cold by his party pervades the Washington Post profile. It cites John J. Castellani, president of the Business Roundtable, an association of chief executives of large U.S. companies, saying of him:

“Obviously, in 2008, America voted for change. But they are maybe finding out now that they didn’t want to vote for big government spending that’s unchecked, or government intervention to a very, very low level into the economy. Mark Warner really represents that kind of middle ground that wants government to help solve problems but not so much interfere with all areas of the economy.”

There is nothing that Democratic Senators like Warner would like more than to work with the President on this middle ground to get America’s economy growing as strongly as it can do in 2010, control public debt and to seriously correct the US’ disturbingly high unemployment. These are causes which, if approached in the right way, these Senators are likely to be able to build bi-partisan support for. Moreover, in terms of the Democrats avoiding mid-term meltdown, we really are looking at a case of “it’s the economy, stupid”.

Obama should be Bill Clinton-like in recognising the political centrality of the economy and also take some lessons from another great Democratic pragmatist: LBJ. While we can all join Anthony Painter in hoping that Afghanistan does not see Obama transformed into Barack B Johnson, Obama should seek to be - pace E. J. Dionne Jr - LBJ-like in terms of working Congress and building up support for his policies amongst Congressmen.

So: insofar as his domestic agenda is concerned, the course which I would recommend to President Obama in 2010 is to reach out to the nation and Congress, particularly colleagues like Warner, through centrist leadership, with a strong focus upon improving America’s economic outlook. This will be the best way to be economical with (indeed, grow) his political capital (which is now dangerously low after the ending of his all too brief honeymoon in the White House). Furthermore, the policies of true radicalism are invariably to be found in policies that are that are the stuff of such leadership, rather than the stuff of Democratic or Republican sacred cows. Essentially, independent voters remain the key demographic (and the biggest threat to Obama being a two term President would come if the Republicans selected a candidate more capable of reaching out to them than someone like Sarah Palin) and the policies which appeal most to these voters are also the policies which will do most to change America in the ways that it should change.

Improvement in America’s economic prospects is a key linkage point between his domestic and international agendas. Niall Ferguson claims that noting that “the yawning US current account deficit was increasingly being financed by Asian central banks, with the Chinese moving into pole position, was, for me at least, the eureka moment of the decade”. He’s right to see this as such a moment and to see this as “the decade that tilted east” and away from the supposed uniploar dominance of the USA.

Given that the Chinese are re-cycling the massive trade surplus that they are running against the US to finance the US current account deficit, part of the correction to this – and an end towards which Obama can work with the likes of Warner – is to reduce the Chinese trade surplus by growing American exports. Another part is to control public debt. There are great opportunities for the American (and British) firms that come to satisfy the wants and needs of the rising middle classes of the BRIC economies, who have got rich (or richer) by producing the exports that are the stuff of the trade deficits (and maxed out credit cards, etc) experienced by both the US and the UK.

But the imbalances in the “Chimerica” economy are too substantial to be corrected by the innovations and efforts of American exporters alone. We’ve have all, allegedly, become Keynesians in the past year or so, but while there has been much talk of fiscal stimulus, there has been much less of the deep concern which Keynes had about surplus economies, which lead to the creation of the Bretton Woods system (though, this system did not conform to the plans Keynes actually had).

There is, perhaps, no better indicator of the way the world has changed than that today the relationship between the Chinese economy (running a massive trade surplus) and the American (running a massive trade deficit) directly parallels the relationship between the American (running a massive surplus) and the British (running a massive deficit) at the time in the 1940s when Keynes’ concerns about surplus economies fed into the debate which resulted in Bretton Woods. 

It is no coincidence that what Derek Scott has described as the “re-emergence of genuine capitalism, including large-scale private sector capital flows” has come about in the decades after the demise of Bretton Woods. This development has been broadly welcome, lifting millions of people in places like the BRIC economies out of absolute poverty. But Bretton Woods increasingly seems something that if it doesn’t exist, as is obviously now the case, is in need of (re)invention. What is required, in essence, is some global mechanism to correct for the imbalances between surplus and deficit economies that are the real story of the economic crisis. 

Andrew Sullivan is, of course, right to lament that ”Britain in the late 1950s had a friendly superpower to whom she could surrender global hegemony. America has no such luxury”. In contrast, the future seems one of contested modernities, with values and visions that would please most Americans and Europeans being ever more marginalised. One of the great dangers that I perceive in coming decades is that the ”west” will react to this by lashing out in ever more ill-advised and dramatic ways. It is again hard to argue with Niall Ferguson’s argument that great episodes of violence occur at the end of empires and the end of America’s empire seems much closer than its beginning.

This would seem much more likely if the “right nation” were to swing back to the right under a President Palin or similar in 2012. The alternative to World War III under Palin, given the absence of a friendly superpower, is to now fashion a multilateral world in which it is much more likely than otherwise that American (and European) interests and values will be best served in the decades to come during which the notion of a unipolar world will be as laughable and out-dated as the excesses of the British Empire now seem (or, at least, the notion of an American unipolar moment may be so, but the Chinese Charles Krauthammer may be closer than many would wish).  

The creation of the global institutions that will form this multilateral world and attempt to steer our Chinese century, now a decade old, is one of the great tasks of Obama’s presidency, and will most probably be passed on to the next president, whether they are as under-qualified or ill-prepared to execute this task as Sarah Palin or otherwise. Obama has made a solid start in this regard, not least through the beefed up role of the G20, but there is much more that remains to be done and, given the significance of the imbalances within the “Chimerican” economy to literally almost everything else, I would commend something along the lines of a Bretton Woods Mark II as a prime candidate for the next round of global institutional building.

The window of opportunity for success in such building is rapidly closing. While the Copenhagen conference itself may be the stuff of such a multilateral world, the outcome of this conference suggests that the Chinese are more interested in looking forward to a very different kind of unipolar world from that envisaged by Krauthammer than working in and through multilateral institutions (i.e. one that would be the stuff of the Chinese Krauthammer’s world view). As one developing country foreign minister said to Mark Lynas: “The Athenians had nothing to offer to the Spartans.” The obvious way to change this dynamic is for the Spartans to have more to offer the Athenians, which, to my mind, takes us back again to the importance of strengthening the American economy, and in turn to Obama working productively with the likes of Warner.

It might seem inane and obvious to propose that America seek to strengthen its economy, but Niall Ferguson is also right that this will require a serious plan for the management of public debt, which may very well require the slaying of some spend-and-tax, Democratic sacred cows, meaning that strong centrist support and leadership will be needed to carry through such a plan. Not least as China’s population is more than four times that of the USA, in the longer-term, it also seems likely to require a immigration system that both provides the labour needed by the American economy and commands the broad support of the American electorate. Such a system is again something which centrist leadership is best able to deliver. 

It might also seem inane and obvious to argue - as I do when I argue that the US should seek to improve its economic performance relative to China and the importance of American exports to Chinese growth - that the negotiating position of American is improved by increased American strength and prestige, but this cuts to the core of many of pivital exchanges confronting America. It is as true around the G20 table as it is in the counterinsurgency battle with the Taliban or battles of will with Iran, North Korea or anyone else. 

The way in which these exchanges are likely to play out could be walked through in game theory models (and such models probably exist in the State Department and elsewhere) but, as any game theorist knows, threats are only of consequence if they are credible. It is clear that American strength is declining as compared with the heady days of the alleged unipolar phase and it is also clear that Obama seems less eager to use force than a Palin or a Dubya (which might be what, ultimately, leads us to the nightmare of a President Palin). However, it is equally clear that America is not without force and influence. To bring this to bear in the great exchanges that confront Obama, a willingness to use this force and influence has to be credible. That’s to say real and seen to be real. In other words, as Obama himself put it in a section from one of his speeches citied by the Economist: “Rules must be binding. Violations must be punished. Words must mean something.”

So: insofar as his international agenda is concerned for 2010, I suggest that President Obama continue to work through and towards the kind of multilateral institutions that will best protect American (and European) interests and values when the world is very much less unipolar than it has been, but without having this faith in multilateral institutions confused with American weakness and seeking to ensure that American strength is brought to bear credibly on all the vital engagements with China, Iran, Israel, North Korea, Russia, Afghanistan, Pakistan et al ad infinitum that confront the US.

This is an agenda that Europe should warmly support. However, it has all too sadly been the case that, while Obama is the President that Europe dreamed of, European governments have been far too slow and unwilling to support Obama in material ways.

If Europe really wants the change that Obama promises, this must change. If liberal America (or liberal anywhere) really wants the change that Obama promises, it too must change. It should stop moaning about Obama and start supporting him. Indeed, all with a stake in the change that Obama seeks (i.e. everyone), should come to genuinely be the change that they want to see in the world. After the poetry of his victory, the prose of the presidency can seem a painful hangover, but change never did come easy.

 ”We tend to think”, as Michael Tomasky notes, ”that Rosa Parks sat on a bus, Martin Luther King gave some great speeches, decent Americans recoiled at racist violence on the nightly news, and boom, change happened. The reality was that nine long years passed from Parks’s act of civil disobedience until Lyndon Johnson signed the civil rights bill – nine years of often mundane and inglorious work.” (That is, of course, by no accident or coincidence the same LBJ that I praised earlier in this blog). “And even then, the civil rights bill didn’t really fix the problem of African Americans being denied the vote, so Congress had to go back the next year and pass the voting rights act.”

Change is tough. But change is already here. “Measured against what different groups of voters thought he had promised – everything they desired – the administration’s performance looks poor”, argues Crook. “Measured against what voters were entitled to expect, it looks much better.” That provides much for liberals to take solace in as they redouble their support for Obama and the Democratic candidates in the mid-terms, but it is what is at stake in terms of the future that should really motivate them in seeking to fortify their President. I am scared of the climatic scenarios painted after the failure of Copenhagen and would be very scared indeed if I came from the Maldives, but the prospect of World War III should scare us all very much more no matter where we come from.

In making recommendations that seek to avert this outcome and bring about the most possible positive change under President Obama, I have probably argued for things which may annoy some liberals or people on the left: “radical centrism”, focusing on the economy, controlling public debt, not being afraid to be prepared to use force to enforce the rules of a multilateral world. I’m sorry if I’ve upset anyone in these ways, but, may be, one lesson of Obama’s first year in office, contrary to what his campaign may have left some people thinking, is that it isn’t possible to please all of the people all of the time.

No one would read Max Weber’s Politics as a Vocation and ever think this possible. However, if this classic text were as widely read and understood as it should be, then, possibly, the kind of leadership from Obama and support for this leadership, which I have argued for here, would be more readily forthcoming. Perhaps, this might be a little worthwhile reading for many of us in what remains of the Christmas holidays.

We should all share the concerns of the Foreign Office. It is only in and through the EU that the UK can best serve our national interests and values. Bizarrely, Tory MEP Roger Helmer describes it as “indefensible, humiliating and wrong” that David Cameron has not yet fulfilled a promise to form a new grouping in the European Parliament with other parties that have been described as ”openly and unashamedly racist and homophobic”. This promise suggests an inability to understand modern British values, let alone take them forward within the EU.

Cameron’s stance has also infuriated key allies, like Angela Merkel and Nicholas Sarkozy, at a time when EU policy co-ordination is imperative. We have been rightly much warned of late of the dangers of beggar-thy-neighbour economic policies. But most people would have less regard for their neighbours if they were racists and homophobes. Indeed, many would have to be really desperate just to pop round to borrow some coffee; never might discuss the right balance between protection for workers, which globalisation requires if it is not to collapse amid charges of unfairness, and protectionism, which retards globalisation but which forms of protection can amount to.

Beggar-thy-neighbour outcomes are dangers in spheres other than the narrowly economic. For example, we are often told that without extra capacity at Heathrow the UK’s competitiveness will erode as compared with other European countries that are expanding their major airports. So, EU countries currently face a choice between the “unpalatable and the disastrous” – J. K. Galbraith’s definition of politics: either they seek to control a major source of carbon or they become less competitive. The only real decision, therefore, is over which of these outcomes they consider unpalatable and which disastrous.

This is rather a zero sum game. You either take a hit to your competitiveness in the short-term or you suffer climate change over the long-term. But all countries will experience climate change, whether they now seek to control airline emissions or not. Thus, countries face an incentive to free ride, expand their airports and bite the bullet of climate change along with everyone else when it comes. After all, “in the long run, we are all dead”. Climate change gives this famous line from J. M. Keynes an even darker twist.

But couldn’t a pan-EU agreement on airport expansion allow us to escape this? The devil would be in the detail of such an agreement, as ever, though there must, at least, be potential for EU policy co-ordination on airport expansion to achieve superior outcomes to those which the present zero sum game is producing. However, it is doubtful that such topics are discussed at the National Front Disco or wherever it is that David Cameron hangs out. Nor is the need for improved European leadership likely to be a hot subject in this bastion of little Englanderism.

The Economist well illustrates the need for this leadership. “Consider the three big requests that Mr Obama made during his European tour: for more help in Afghanistan; for more fiscal stimulus; and for Europe to become more serious about energy security (ie, buy more non-Russian gas). Almost nothing was offered on the first and third, and the G20 conclusions papered over lingering transatlantic differences on stimulus plans and financial regulation. And Mr Obama also earned a public rebuke from Mr Sarkozy for strongly backing Turkish membership of the EU, which the French president opposes”.

Three things are clear. First, while Obama may have been the President that all of Europe wanted, his requests to Europe are closer to British agendas than to those of our EU partners. Our commitment to Afghanistan is witnessed in the troops we have deployed to Helmand – a commitment which George Robertson is right to chide other EU countries for not matching. We recognise the geo-strategic importance of Turkey in a way that other EU countries seem to struggle to. We see the unhealthy grip which Russian gas has upon the continent and want to avoid this fate for ourselves. And we, unlike others in the EU, are up for as much fiscal stimulus as we can afford.

Second, under Obama, the weight that Washington attaches to London will be positively correlated with the weight that London carries in Brussels. It shouldn’t be too hard for us to argue in Brussels for causes favoured by Obama because we too favour these causes; the more effectively that we do so, the stronger our relations with Obama’s America. The transatlantic relationship remains a key component of British influence on the global stage, but this relationship is now more bound up with our European relations than ever before at a time when the main fault line in global politics is to be found in the Pacific, not the Atlantic. This is the way of this Chinese century.

Third, in this context, Cameron threatens British marginalisation on the global, as well as the European stage. This is the exact opposite of what we now need. In fact, it is indefensible, humiliating and wrong. We shouldn’t forget this when we vote in June’s EU elections.

“We know this recession will end one day. The oil price is not going to be low for ever. To prepare for the day when it soars again, to make good on commitments to reduce carbon emissions and to be free of dependency on the likes of Russia and Saudi Arabia, we have to get much more ambitious about renewable energy”.

So, like me, NESTA and Al Gore, Rawnsley thinks that now is an opportune moment to realise the immense economic and social potential of environmental technology. Rawnsley also comes out in favour of the NESTA recommendation for “universal, ultra-fast broadband access to all parts of the country”. His third suggestion is “a programme to modernise the railways”, which he convincingly argues is “a no-brainer”. The case for such a programme certainly seems far more clear-cut than the case for an extra runway at Heathrow.

Lindbeck and Snower argue that the key to the success of Keynesian infrastructure investments is whether they increase the marginal product of labour and capital. Part of the attraction of the policies advocated by Rawnsley and NESTA is that they seem likely to satisfy this criterion. They wouldn’t be a “crass Keynesianism” but a smart Keynesianism.

“The world cannot support indefinitely continued debt-financed overconsumption on the part of the US, whether this consumption takes place at the private or public level, and it cannot support continued growth in Chinese capacity without more rapid growth in Chinese consumption.  To continue in this way almost certainly means little more than to postpone a larger and more difficult adjustment on the part of both countries, and will probably eventually lead to a collapse in international trade”.

Troubled times, indeed. But, at least, the US is going to soon be under superior leadership. And the special relationship will help the UK steer through any choppy waters, right? Well, it may no longer be safe as houses (and how safe is that?) if it needs to rest upon an Obama-Cameron axis.  It seems that Obama takes a dim view of the pro-American and Eurosceptic mix offered up by Cameron. 

Where does this leave the UK? A senior Labourite is reported as reacting to Obama’s view on Cameron by saying: “Obama will want to work with a united Europe, not the 27 divided nations envisaged by a David Cameron, William Hague and [the Eurosceptic backbencher] Bill Cash vision of Europe. Tory isolationism is the last thing Obama’s new foreign policy team will want from London”.

In a world potentially ruptured by a trade war emanating from the Pacific, the kind of squabbles across the Channel that have personified Cameron’s approach to foreign policy seem pathetically irrelevant and marginal. What a contrast with the global reverence and respect which Gordon Brown’s economic management has recently earned.

Lindbeck and Snower have written an excellent paper that has the potential to move the debate beyond this. It investigates the central Keynesian claim that product demand changes are transmitted to the labour market. The solution to the unemployment problem, therefore, does not lie in the labour market in itself but in a dearth of demand in the product market. Thus, public spending to correct this dearth transmits itself to the labour market in the form of reduced unemployment. Lindbeck and Snower examine the means by which such a transmission mechanism can exist. The paper should appeal both to those with an interest in theoretical economic questions and to those concerned with practical macroeconomic policy questions. I recommend giving it a read and confine myself here to reproducing one of the policy implications that Lindbeck and Snower see as following from their work.

“Government spending in the form of infrastructure investment may have a bigger impact on employment than tax reductions or increased transfer payments”.

This infrastructure investment should have this effect if it increases the marginal product of labour and capital. Policy debate, therefore, should focus on the extent to which proposed infrastructure investments are likely to produce these increases. So: the announcement from Geoff Hoon this week should be welcome insofar as transport projects have this effect.