The deficit problem: Dealing with America’s fiscal hole

Nov 19th 2009
From The Economist print edition

Don’t cut the deficit now—but explain how, eventually, you will

Jon Berkeley

 

FOR years America’s fiscal problems had a surreal quality. No one disputed that an ageing population and health-care inflation could bust the budget, but that prospect was decades away and procrastination seemed painless. No longer. A giant hole has opened in the budget because of stimulus, bail-outs and a recession that has savaged economic growth and tax revenue. On current policies the publicly held federal debt, 41% of GDP last year, will double in the next decade (see article). Total government debt will move well above the G20 average. In a few years the AAA rating of Treasury bonds, the world’s most important security, could be in jeopardy.

America’s fiscal deficit: Stemming the tide

Nov 19th 2009 | WASHINGTON, DC
From The Economist print edition

 

Unprecedented levels of government debt may require radical solutions

Illustration by Bill Butcher

[Greg Ip] STUDENTS at National Defence University in Washington, DC, were recently given a model of the economy and told to fix the budget. To get the federal debt down, they jacked up taxes and slashed spending. The economy promptly tanked, sending the debt to higher levels than before. The lesson: “You’ll never get re-elected and you may do more harm than good,” concluded Eric Bee, an air-force colonel who took part in the exercise.

This is the ugly arithmetic of America’s public finances. Recession and aggressive fiscal stimulus have hugely swollen the federal deficit. Stimulus was essential to cushion a collapse in private demand. In spite of that, the economy has barely emerged from recession and unemployment is still rising, feeding speculation that more stimulus is needed. Yet at the same time voters are growing alarmed at the tide of red ink, and it may be only a matter of time before markets do, too.

U.S. Economic Outlook for 2010: Square Root Reversal

Nov 13th 2009
From The World in 2010 print edition
By Greg Ip, WASHINGTON, DC

 

 

America will recover, but too weakly for comfort

The American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth.

Recessions interrupt the economy’s natural inclination to grow. They create pent-up demand for homes and other goods, and prompt businesses to slash production, payrolls and investment to levels well below what normal sales require. Ordinarily, the deeper the downturn, the more powerful the reversal of those effects. Based on experience, the American economy, which shrank by some 4% over the course of the 2007-09 recession, ought to grow by as much as 8% in its first year of recovery. The unemployment rate, around 10% in late 2009, should drop to about 8%.

That won’t happen. But growth could still beat the consensus forecast of 2.5% in 2010.

The U.S. in 2010: The Fed’s next battle

Nov 13th 2009
From The World in 2010 print edition
By Greg Ip, WASHINGTON, DC

This time, with politicians

How tight is Bernanke’s grip?

In the 1930s the Federal Reserve stood by as the economy sank into Depression. Retribution followed as Franklin Roosevelt concentrated more of its governance in Washington, DC. Today’s Fed, under its chairman, Ben Bernanke, has been hyperactive in preventing another Depression, yet again faces political peril. In 2010 critics in Congress will seek to rein in its independence even as its defenders in the Obama administration push to expand its regulatory powers.

Obama and the unions: Love of Labour

Oct 29th 2009 | WASHINGTON, DC
From The Economist print edition

Unions are winning again in Washington, but the big fights are still ahead

Getty Images

 

[Greg Ip] THREE years ago, when negotiations with the union representing air-traffic controllers reached an impasse, the administration of George Bush simply imposed a deal that froze salaries, slashed entry-level pay and even set a dress code. Barack Obama, then a senator, sponsored a bill to send the parties to arbitration, without success at the time. As president, Mr Obama ordered talks to resume. In late September, with the help of the arbitrators, the union got its new contract: 3% annual pay increases, higher starting pay and the right, once again, to wear jeans.

Ronald Reagan’s mass firing of illegally striking controllers in 1981 came to signify a turning-point in the fortunes of organised labour, whose share of private-sector workers has fallen to a new low of 7.3% so far this year (see chart). It is tempting to see the controllers’ new deal as marking a turning-point in the other direction.

The economy: A joyless recovery

Oct 29th 2009 | WASHINGTON, DC
From The Economist print edition

New figures suggest that America has at last moved out of recession

Getty Images

[Greg Ip] ON October 29th the government reported that gross domestic product rose at an annualised rate of 3.5% in the third quarter compared to the second. This was the first increase since the second quarter of 2008. It backs up other evidence that the recession ended in the third quarter or just before, though the official decision, by the National Bureau of Economic Research, a group of academic economists, is still some way off. Robert Gordon, a member of this group, is confident that the recession, which began in December 2007, ended in June. But at 18 months that would still make it the longest since 1933.

Consumers are sceptical.

The use & abuse of economic history

 

80 years after the crash that ushered in the Great Depression, we’re not repeating history’s mistakes. We’re making our own.

By Greg Ip

Sunday, October 25, 2009

 Book review of:

THIS TIME IS DIFFERENT: Eight Centuries of Financial Folly,  By Carmen M. Reinhart and Kenneth S. Rogoff, Princeton Univ. 463 pp. $35

THE CREATION AND DESTRUCTION OF VALUE: The Globalization Cycle, By Harold James, arvard Univ. 325 pp. $19.95

The Dow’s recent vault back to the neighborhood of 10,000 inspired a sense of relief far more than it did any urge for celebration. We have been through a dreadful recession, but at least, the market tells us, we have avoided a depression.

Or have we? This week marks the 80th anniversary of the crash that ushered in the Great Depression. In recent months, the Dow’s behavior has eerily mimicked those dark days when the index leapt from its 1929 lows to rally 48 percent into 1930. It was a false dawn: The worst of the Depression was still to come.

A popular refrain during our modern-day financial crisis is that we have forgotten the lessons of economic history. But Americans are not ignorant of the past: Many are obsessed with it. Countless investors scrutinize stock charts and bet on history repeating itself. However, few win this way. Our problem is not ignorance of history but an inability to know which bits are most relevant to the present.

America’s public debt: Tomorrow’s burden

Oct 22nd 2009 | WASHINGTON, DC
From The Economist print edition

America’s debt crisis will be chronic, not acute

Illustration by Belle Mellor

 

[Greg Ip] AS AMERICA’S financial crisis recedes, the rumblings of its next crisis can be heard. The federal government has wrapped its guarantees around banks and the housing market. It has borrowed hundreds of billions of dollars to stimulate the enfeebled economy, while tax revenues crumble. And in the years to come the cost of retirees’ benefits will explode. “There is every reason to worry that the banking crisis has simply morphed into a long-term government-debt crisis,” says Kenneth Rogoff of Harvard University.

But what kind would it be: acute or chronic?

Why did only some countries have banking crises?

On Oct. 9 I appeared on a panel at the American Enterprise Institute discussing a paper by Vincent Reinhart on the financial crisis. While many countries were affected by common global factors, I focused on how some countries escaped crisis even while they were affected by the same factors as others. View the slide show of my presentation here:

Greg Ip comment on Reinhart.

The economy’s stumble: Air pocket or second dip?

Oct 8th 2009 | WASHINGTON, DC
From The Economist print edition

A slump in September prompts thoughts of new stimulus

[Greg Ip] AFTER riding a wave of improvement since the spring, the economy stumbled in September according to the latest figures. Non-farm employment sank by 263,000, which was 62,000 more than in August, and the unemployment rate rose by 0.1% to 9.8%. Car sales tumbled as the federal “cash-for-clunkers” programme expired. Manufacturing activity cooled a bit.

All this is probably an air pocket; overall economic output almost certainly began to rise in the third quarter of the year and employment will eventually follow. Leading indicators such as the stockmarket and new claims for unemployment benefits are signalling recovery. But it is taking a painfully long time.