Greg Ip

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

Archive for December 2010

The legacy of Larry Summers

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Dec 13th 2010, 22:10 by G.I. | WASHINGTON

[Greg Ip] FOR two years the Obama Administration’s economic policy has been caricatured from the right as an invasive expansion of government and from the left as a cowardly capitulation to Wall Street free market fundamentalism.

How can it be both things at once? It helps to understand the philosophy of the man who most embodies that policy, Larry Summers, who today delivered perhaps his final public speech as Barack Obama’s National Economic Council director. The “Summers Doctrine” fuses microeconomic laissez faire with macroeconomic activism. Markets should allocate capital, labour and ideas without interference, but sometimes markets go haywire, and must be counteracted forcefully by government. Read the rest of this entry »

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December 31, 2010 at 7:17 pm

Budget deficit vs current account deficit

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A reader of “The Little Book of Economics” asks  the following :

“All else equal, does a larger budget deficit imply a larger current account deficit?”

Chapter 7 of my book (“All the world’s an ATM”) notes that when a country spends more than it earns, it must borrow the difference from abroad, or sell foreigners some assets. This produces a current account deficit. Here, I’ll explain how domestic behavior produces a current account deficit. Read the rest of this entry »

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December 31, 2010 at 6:59 pm

American economy: Proceed with caution

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America’s economy looks set for a good year. But investors should beware the treacherous path beyond 2011

Dec 29th 2010 | from PRINT EDITION

THE American stockmarket enters 2011 in a jolly mood. In the past four months it has leapt by 20%, to heights last enjoyed when Lehman Brothers was a going concern. Investors are likely to cheer a second consecutive year of double-digit returns.

This partly reflects growth elsewhere: American companies make a third of their profits outside the United States. But the most recent spurt has been driven by a sharp change in the outlook at home. At the end of the summer Wall Street worried that growth was grinding to a halt. The Federal Reserve was running out of monetary ammunition. The incremental contribution of Barack Obama’s $814 billion stimulus had faded and a gridlocked Congress seemed incapable of supplying new support. Big business was rattled by Europe’s sovereign-debt crisis. Wall Street’s bears sniffed deflation.

What has changed? In part it is simply a case of the underlying American economy turning out to be stronger than pessimists imagined: consumer spending, business investment and job creation are all up lately. But policymakers have also done their bit. In November the Fed began a second round of “quantitative easing”—buying bonds with newly created money in order to push down long-term interest rates and stimulate lending. And in December Mr Obama and the Republicans agreed to extend George Bush’s tax cuts until the end of 2012 and to pump a further $300 billion into the economy in 2011 through a payroll-tax cut and other measures. The deal should spur growth; it also got rid of the (until then very real) danger of inadvertent fiscal tightening tipping the economy back into recession. That is the main reason why bond yields have risen with share prices. Bolder investors are less willing to accept rock-bottom yields in return for safety.

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Put these things together, and the American economy could grow by nearly 4% in 2011: so Wall Street is right to be cheery on that score. But share prices are meant to be based on more than just the next 12 months’ earnings, and the medium term is as treacherous as ever; perhaps more so

The original article is linked here.

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December 29, 2010 at 7:14 pm

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Demography and the Economy: As Boomers Wrinkle

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FROM the moment they entered the workforce in the 1960s, baby-boomers began to shape America’s economy and politics. They will do the same as they leave. The first of the estimated 78m Americans born between 1946 and 1964 turn 65 in 2011, the normal age for retirement. As their ranks swell in coming years, the burden of financing their retirement will mount. So will their electoral importance.

Retiring boomers will squeeze the economy from two directions. The number of people enrolled in Medicare (federally funded health care, available from the age of 65) will grow from 47m in 2010 to 80m in two decades’ time. Enrolment in Social Security (federally funded pensions, available from the age of 62-67, depending on your birth year) will grow from 44m to 73m. The cost of the two programmes will grow from 8.4% of GDP in 2010 to 11.2% by 2030. Meanwhile, as boomers retire, the workforce will grow more slowly, as will the taxes to finance their benefits. The pensioner-worker imbalance and health-care inflation, which is driving up the bill for Medicare and Medicaid, the federal health benefit for the poor, will send the budget deficit into the stratosphere.

Both Barack Obama and Republicans in Congress claim that reforming such entitlements is a priority. But a demographic snag lies in the way. In the next two decades people aged 65 and over will rise from 17% of the voting-age population to 26% (see chart 1). Since the old vote more readily, their actual share of the electorate will be some three percentage points higher, reckons Robert Binstock, a political scientist at Case Western Reserve University in Cleveland.

The entire  article is linked here.

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December 29, 2010 at 7:11 pm

The president’s deficit commission: No cigar

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Some useful ideas, but a worrying absence of political will
Dec 9th 2010 | WASHINGTON, DC | from PRINT EDITION

[Greg Ip] WHEN Barack Obama created his deficit commission one of its members, Kent Conrad, a Democratic senator, confided to his staff that he thought it had no better than a 10% chance of success. His prediction proved accurate. On December 3rd just 11 of its 18 members voted for the chairmen’s aggressive deficit-reduction proposal, well short of the 14 needed to take it forward to Congress for a vote.

Yet Mr Conrad, like many on the commission, claims that this apparent defeat was in fact a victory. After all, 11 is more than 60% of the members, and those voting for the plan included both conservative Republicans like Tom Coburn and liberal Democrats like Dick Durbin, senators from Oklahoma and Illinois respectively. The commission defied sceptics who thought its work would go unnoticed. “We’ve changed the issue from whether there should even be a fiscal plan…to what is the best fiscal plan,” said Andy Stern, former president of the Service Employees International Union and another member (though he still voted against).

Yet for all the warmth and goodwill that flowed between the commission’s members over its seven months of work, the final vote exposed the depressing truth that finding a package of higher taxes and lower spending that can satisfy both Democrats and Republicans is extremely hard, if not impossible.

The entire original article is linked here.

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December 9, 2010 at 4:28 pm

Did Barack Obama lose a political battle but win a war?

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Dec 7th 2010, 19:47 by G.I. | WASHINGTON

[Greg Ip] THE number crunchers have had their first stab at Monday’s tax deal and the economic impact is impressive. Goldman Sachs now thinks the economy will grow as much as one percentage points faster next year than its current forecast of 2.7%, which was bumped up from 2% only a week ago. JPMorgan has raised its 2011 forecast (fourth quarter compared to a year earlier) to 3.5%, from 3%. Moody’s Economy.com sees growth next year at 4%. All of these forecasts imply some decline in the unemployment rate. Read the rest of this entry »

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December 7, 2010 at 12:30 pm

Austerity delayed

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Dec 7th 2010, 3:11 by G.I. | WASHINGTON

[Greg Ip] FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts.

The entire original post is linked here.

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December 6, 2010 at 11:00 pm

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