Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for November 2010

America’s deficit: Confronting the monster

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At last, plans are appearing to cut America’s deficit. But will politicians and the public embrace them?

Nov 18th 2010 | Washington, dc

[Greg Ip] BARACK OBAMA and his Republican opponents have spent much of the past month sniping at each other, but on November 15th they suddenly found themselves agreeing. Mitch McConnell, the leader of the Senate Republicans, called for a ban on earmarks, the pet projects politicians like to pop into spending bills. Mr Obama, who also wants a curb on them, quickly applauded.

A cynic would say that such agreement was easy, since the stakes are so low. Earmarks attract plenty of bad press, but the money is trivial—less than 0.5% of federal spending. On the more pressing question of how to close America’s gaping deficits, Democrats and Republicans remain far apart. Only a week before, the chairmen of a bipartisan commission set up by Mr Obama in February to find ways to get the deficit down floated a proposal focused on cutting spending. Republicans liked this, but Nancy Pelosi, the Democrats’ leader in the House of Representatives, called the idea “simply unacceptable”.

This sound and fury, however, may signify something important. The two sides are no longer arguing over whose taxes to cut or which entitlements to expand, but whose taxes will rise and which entitlements will shrink. It may all come to naught; or it may signal the dawn of a new age of austerity, similar to the era of tax increases and entitlement cuts that prevailed from 1982 to 1997.

America’s budget deficit in the fiscal year that ended on September 30th stood at $1.3 trillion; at 9% of GDP, the second-largest since the second world war. (Fiscal 2009 was the biggest.) That figure reflects the effects of the recession and the temporary stimulus, both of which will fade. The real problem is the future. On current policies the Congressional Budget Office (CBO) reckons that the federal debt, now 62% of GDP, will hit 87% by 2020. Add in state and local-government borrowing, and the total approaches 110%.

According to the IMF, America’s structural deficit and the growth in its debt over the medium term are among the worst in the rich world. The United States also stands out for its lack of any plan to deal with this. Germany has passed a balanced-budget constitutional amendment. Britain’s coalition government has launched an ambitious four-year plan to slash its massive deficit. Nicolas Sarkozy, France’s president, has finally triumphed in a bruising battle to raise the pension age.

America has a good and a bad excuse for its inaction. The good one is that the economy isn’t ready. Economic growth in the second half of this year has been a painful 2% at an annual rate. The unemployment rate, at 9.6%, remains near its peak. The effects of the stimulus are wearing off, so fiscal policy now veers towards contraction. If taxes rise or spending falls immediately, the economy could slide back into recession, as happened in Japan in 1997.


Giveaway and takeaway

But there is also a bad reason for delay: America’s political culture is unused to austerity. The country’s fiscal policy alternates between “giveaway” and “takeaway”, says Gene Steuerle, a Treasury official in the 1970s and 1980s and now a scholar at the Urban Institute, a think-tank. From 1946 to 1981 was an era of giveaway: entitlements expanded, most notably with Medicare and Medicaid in 1965, and taxes were cut, most famously in Ronald Reagan’s first year in office, in 1981. In 1982, however, fiscal policy flipped to takeaway. Mr Reagan’s tax cuts and defence build-up, compounded by the 1981-82 recession and sky-high real interest rates, produced record structural deficits. Pete Domenici, then a junior Republican senator, remembers going to the White House with other Republicans in 1982 to talk to Reagan about the deficit. He recalls the president’s stunned disbelief when he told him that he could run up more debt than all his predecessors combined.

The full article is linked here.

Written by gregip

November 18, 2010 at 4:18 pm

America’s deficit: Confronting the monster

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At last, plans are appearing to cut America’s deficit. But will politicians and the public embrace them?

Nov 18th 2010 | WASHINGTON, DC | from PRINT EDITION

[Greg Ip] BARACK OBAMA and his Republican opponents have spent much of the past month sniping at each other, but on November 15th they suddenly found themselves agreeing. Mitch McConnell, the leader of the Senate Republicans, called for a ban on earmarks, the pet projects politicians like to pop into spending bills. Mr Obama, who also wants a curb on them, quickly applauded.

A cynic would say that such agreement was easy, since the stakes are so low. Earmarks attract plenty of bad press, but the money is trivial—less than 0.5% of federal spending. On the more pressing question of how to close America’s gaping deficits, Democrats and Republicans remain far apart. Only a week before, the chairmen of a bipartisan commission set up by Mr Obama in February to find ways to get the deficit down floated a proposal focused on cutting spending. Republicans liked this, but Nancy Pelosi, the Democrats’ leader in the House of Representatives, called the idea “simply unacceptable”.

This sound and fury, however, may signify something important. The two sides are no longer arguing over whose taxes to cut or which entitlements to expand, but whose taxes will rise and which entitlements will shrink. It may all come to naught; or it may signal the dawn of a new age of austerity, similar to the era of tax increases and entitlement cuts that prevailed from 1982 to 1997. Read the rest of this entry »

Written by gregip

November 18, 2010 at 3:07 pm

Five myths about the Federal Reserve

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By Greg Ip
Friday, November 12, 2010;

Washington Post Outlook

The Federal Reserve’s announcement on Nov. 3 that it will buy $600 billion worth of Treasury bonds to help boost the struggling U.S. economy reverberated around the world this past week, with condemnation from critics as varied as Sarah Palin and the president-elect of Brazil. Yet much of what the Fed and its chairman, Ben Bernanke, have done is shrouded in confusion and misperceptions.

1. By printing money, the Fed will create runaway inflation.

The Nobel Prize-winning economist Milton Friedman issued a famous dictum nearly 50 years ago: “Inflation is always and everywhere a monetary phenomenon.” His belief has become widespread over the years, to the point that even many non-economists assume that when the Fed prints money, higher prices inevitably result. But the link between money and inflation is weaker than people think. Read the rest of this entry »

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November 14, 2010 at 9:56 pm

Does monetary protectionism lead to trade protectionism?

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Nov 11th 2010, 22:48 by G.I. | WASHINGTON, DC

[Greg Ip] BEHIND today’s hand-wringing over currency wars is the fear that it’s one small step from currency intervention and capital controls to traditional, noxious protectionism: tariffs, quotas, subsidies, etc. For example, Gerald O’Driscoll at the Cato Institute writes:

The Fed’s announced purchase is an exercise in monetary protectionism. It has already produced countermeasures in terms of capital controls by Brazil and perhaps others. It may lead to trade protectionist countermeasures. Monetary protectionism breeds trade protectionism and risks a global meltdown in trade as occurred in the 1930s, which paved the way for World War II.

And Alan Greenspan obliquely makes the same point today in the Financial Times.

But is it true? Does monetary protectionism breed traditional protectionism? I could argue the opposite. If monetary protectionism softens the pain felt by the trade sector, it weakens demands for the traditional variety. When America succeeded in devaluing the dollar against the yuan in 2005, it stopped the momentum of anti-China trade bills in Congress.

 

The original blog post is linked here.

Written by gregip

November 11, 2010 at 10:24 pm

The history of finance: The man who stamped the crash

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How Ferdinand Pecora won the blame game

Nov 11th 2010

The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance. By Michael Perino. Penguin Press; 352 pages; $27.95. Buy from Amazon.co.uk

[Greg Ip] FINANCIAL crises have many causes and multiple actors. Sometimes, though, a single, electrifying interpretation emerges to capture the public imagination and dominate the political response. It has yet to happen with the current crisis. But for the Depression it struck dramatically over a mere ten days in early 1933, just before Franklin Roosevelt took office.

In the years after the 1929 crash, Wall Street, except for a few scoundrels, had largely escaped broad condemnation, portraying itself guilty of nothing more than the same irrational exuberance that had seized ordinary investors. In his entertaining new book, “The Hellhound of Wall Street”, Michael Perino recounts how Ferdinand Pecora, the tenacious and theatrical chief counsel to the Senate Committee on Banking and Currency, altered that impression. By the time Pecora was finished, the public saw Wall Street’s finest not as bystanders but as malicious purveyors of the misfortune that had affected millions.

The original article is linked here.

Written by gregip

November 11, 2010 at 10:01 pm

The president’s deficit commission: Nice try

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But the full commission may well decline to support its chairmen’s proposal

Nov 11th 2010

[Greg Ip] AMERICAN voters, spared a serious discussion of the budget in the midterm elections, are about to get an earful on the subject. On November 10th Erskine Bowles and Alan Simpson, co-chairmen of Barack Obama’s deficit commission, proposed sweeping tax reforms and spending overhauls to cut the deficit to 2.2% and stabilise the debt at 69% of GDP by 2015. The deficit would be 4.3% in 2015 and the debt 90% in 2020 under Mr Obama’s most recent budget, the Congressional Budget Office reckons.

The original article is linked here.

 

Written by gregip

November 11, 2010 at 9:59 pm

QE: Greg Ip answers Felix Salmon’s questions

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From Felix Salmon’s blog.
Are you still confused about quantitative easing, what it is and how it works? I certainly was, and so I asked a genuine expert on the matter — Greg Ip, the author of The Little Book of Economics: How the Economy Works in the Real World — whether he could answer a few questions for me. Greg’s been writing some great blog entries on this subject at the Economist, like the onelinked to this morning, but sometimes you need to take a few steps back to clear up some very basic questions first. Thank you, Greg, for these fantastic answers! If you like them, go buy his book!

FS: Does the Fed print money? If so, how?

GI: Yes, and I’m surprised to see Pragmatic Capitalist dispute this.

It’s true that the Fed is not literally printing the $20 bills that end up in your wallet. As acommenter on your own blog has noted, that’s the job of the Bureau of Printing and Engraving. But money includes both currency in circulation and the reserves that commercial banks keep on deposit at the Fed. By that definition, the Fed is indeed printing it.

Here’s how QE works. The Fed buys a $100 bond from Bank of America. The bond gets added to the Fed’s assets. Bank of America has an account at the Fed. The Fed, with a keystroke, puts a $100 into B of A’s account. Where did the money come from? Thin air. Bank of America can visit its friendly neighborhood Fed branch and withdraw that $100 in the form of bills and coins. So for practical purposes the distinction between currency and reserves is meaningless; the monetary base includes both. Read the rest of this entry »

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November 8, 2010 at 10:19 pm

It goes to the Fed’s motive

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Nov 5th 2010, 19:45 by G.I. | WASHINGTON, DC

[Greg Ip] IN COURTROOM dramas, the prosecutor often dredges up some seemingly irrelevant fact about the accused by arguing, “It goes to motive, your honour.”

That’s where the Fed finds itself in today. Quantitative easing is fully justified by high unemployment and falling inflation at home, but the Fed is being pummeled in the court of public opinion because its motives are suspect: other countries think the Fed is trying bludgeon them into assuming more of the burden of global growth via a vastly depreciated dollar.

The latest indictment comes from Sebastian Mallaby, fellow at the Council on Foreign Relations and formerly of The Economist. Mr Mallaby articulates the diplomatic case against QE. America, he notes, has long urged China to allow its currency to appreciate so as to reduce its trade surplus and thus its contribution to the global savings glut and the world’s current-account imbalances:

The Fed’s return to quantitative easing threatens to create a glut of liquidity reminiscent of the mid-2000s savings glut… Already, countries from Brazil to Thailand have responded to the flood of incoming capital by imposing controls and taxes, retreating from the idea of financial globalization. Even before the Fed’s action this week, there was much loud talk of currency war. This now seems sure to intensify, and the United States has lost its moral authority to broker currency peace.

I agree that this is how the world perceives what the Fed has done. But it’s wrong. Read the rest of this entry »

Written by gregip

November 5, 2010 at 10:28 pm

The Fed’s big announcement: Down the slipway

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“Quantitative easing” is unloved and unappreciated—but it is working

Nov 4th 2010 | WASHINGTON, DC

[Greg Ip] EVEN before the Federal Reserve unveiled its second round of quantitative easing (QE) on November 3rd, critics had already denounced it as ineffectual or an invitation to inflation. It cannot be both and it may not be either.

The announcement of “QE2” was hardly breathtaking. The Fed said it will buy $600 billion of Treasuries between now and next June, at about $75 billion a month, although it also said it could adjust the amount and timing if need be. That was about what markets expected but far less than the $1.75 trillion of debt it bought between early 2009 and early 2010 in its first round of QE. Yet QE2 seems already to have exceeded the low expectations it has aroused. Since Ben Bernanke, chairman of the Fed, hinted at it at Jackson Hole on August 27th, markets have all done exactly what they should (see chart).

The original article is linked here.

Written by gregip

November 4, 2010 at 10:13 pm

Economic policy: Countdown

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Deadlines loom, but a gridlocked government may not be able to act

Nov 4th 2010 | WASHINGTON, DC

[Greg Ip] WALL STREET wisdom holds that political gridlock is good for the economy. When Democrats and Republicans are busy quarrelling, the theory goes, they have less time to tie up business in red tape or to bust the budget.

That wisdom is about to be tested. On October 29th the government reported that GDP grew no more than 2% at an annual rate in the third quarter, barely enough to keep joblessness from rising, much less to create work for the 8m who lost their jobs during the recession. Growth in the current quarter looks no healthier.

The full article is linked here.

Written by gregip

November 4, 2010 at 10:06 pm

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