Greg Ip

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

Archive for June 2011

Republicans and the debt ceiling: Speaker Boehner doesn’t have the numbers

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Jun 30th 2011, 21:20 by G.I. | WASHINGTON

HOUSE Speaker John Boehner is fond of saying that a debt-ceiling deal that raises taxes cannot pass the House of Representatives. Slice the numbers a bit more carefully and you can easily conclude the opposite: a deal that doesn’t raise taxes won’t pass, either. Read the rest of this entry »

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June 30, 2011 at 12:33 pm

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Trade pacts: Progress, of a sort

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Coupling trade with worker aid

Jun 30th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] BARACK OBAMA is a late and reluctant convert to free trade. As a senator he opposed many trade agreements negotiated by George Bush—among them deals with Korea, Colombia and, for a time, Panama. As president he has given his backing to those deals, provided Korea did more to admit American cars, Colombia made greater efforts to prevent the murder of union activists, and Panama tried harder to crack down on tax cheats. Satisfied on those fronts, he then insisted that Congress should also reauthorise Trade Adjustment Assistance, or TAA, which provides American workers who lose their jobs to foreign competition with training, income support and subsidised health insurance.

He appears to have won that as well. On June 28th the White House said it had a deal with Max Baucus and Dave Camp, the Democratic and Republican chairmen of the trade committees in the Senate and House respectively, to bundle reauthorisation of TAA in with the Korean deal. Mr Obama would then submit all three pacts to Congress for ratification, along with renewal of preferential tariffs for poor countries. Read the rest of this entry »

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June 30, 2011 at 12:15 pm

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The Fed’s forecasts: Serial disappointment

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Jun 23rd 2011, 20:31 by G.I. | WASHINGTON

THE Fed attracted attention this week for downgrading its forecast not just for this year, but for 2012, as well. More striking is how often it does this. As my nearby chart shows, the Federal Open Market Committee has repeatedly ratcheted down its forecasts of out-year growth. The latest downward revision is particularly large, and in keeping with the pattern: when the current year disappoints, they take a bit out of the next, as well. (The chart shows all their forecasts since early 2010 except two, for the sake of simplicity.)

This is not because the Fed thinks the economy’s potential has diminished: long-run growth forecasts remain the same and they’ve raised their view of the long-run unemployment rate just a smidgen.

I asked Ben Bernanke, the chairman, at his press conference, why, if the restraints on the economy are temporary, the FOMC lowered its medium-term outlook. Read the rest of this entry »

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June 23, 2011 at 12:30 pm

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America’s debt ceiling: The mother of all tail risks

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A US technical default would convulse markets. Nothing else is certain

Jun 23rd 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] AMERICA’S debt is supposedly the world’s safest, backed by trustworthy courts and an unrivalled capacity to raise taxes and print money. Yet thanks to a quirk of law, talk of default is not confined to the European side of the Atlantic.

Unlike most countries America requires two legal steps to run a deficit: one to pass budget bills, the other to borrow the money. Congress sets a ceiling on how much the country may borrow. In the past it has always raised the ceiling before the Treasury ran out of cash, doing so on 16 occasions since 1993 alone. But it often attaches conditions, and this year Republicans who control the House of Representatives are insisting on particularly onerous terms. With the debt and the deficit at their highest in 60 years, they want to see at least $2 trillion in spending cuts over ten years and no tax increases.

If a deal cannot be reached before August 2nd the Treasury says it will be forced to default. It has not specified on what: it could choose to stop paying pensioners and soldiers before it stopped paying interest on its debt. But outright default cannot be entirely ruled out. What happens if the world’s most trustworthy borrower reneges on its debt?

The possibility has not gone unnoticed. Trading in credit-default swaps (CDSs) on Treasury securities has picked up and the price of protection against default, as measured by the CDS spread, has risen (see chart). One-year protection is now almost as expensive as five-year protection. This is more often seen in distressed markets where investors are pricing in an imminent default than with otherwise healthy borrowers with long-term problems.

The illiquidity of the CDS market means it can be prone to misinterpretation. The vast Treasury market itself—for Treasury bills, Treasury bonds and other government securities—remains largely free of anxiety. America’s biggest interest payments occur on the 15th of August, November, February and May. Priya Misra, head of US rates strategy at Bank of America Merrill Lynch, says anyone who thinks America might default for several weeks this summer should sell a bond with interest due on August 15th and buy one with interest due on November 15th, which would result in the price of the first bond falling relative to the second. But, she says, neither market pricing nor the chatter of clients shows such a trend. Read the rest of this entry »

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June 23, 2011 at 12:24 pm

Posted in Uncategorized

Ethanol subsidies: Fiscal sobriety

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A bipartisan vote to end ethanol subsidies is a small but heartening sign

Jun 23rd 2011 | WASHINGTON, DC | from the print edition

 [Greg Ip] TWO of the iron rules of American politics are that Republicans don’t vote for higher taxes and only the foolhardy vote against Iowa. Both were broken on June 16th when senators from both parties voted by sizeable margins to repeal a tax credit and tariff on ethanol.Since 2004 blenders have received a credit, now worth 45 cents, for each gallon of ethanol they mix with regular gasoline (petrol). Most of the benefit flows down to farmers. And since 1980 domestic producers have also been protected by a 54 cent tariff on imports, which serves to keep out ethanol made more cheaply from Brazilian sugar cane.

Defenders say the credit and tariff reduce American dependence on imported fossil fuels and reduce carbon dioxide emissions. But it is an inefficient way to do both. Because ethanol produces less energy than petrol and requires the burning of fossil fuels in its production, and because ethanol would still be used without a credit, the taxpayer pays about $1.78 to reduce petrol consumption by one gallon via corn-based ethanol. Taking everything into account, ethanol releases almost as much carbon dioxide as petrol does. As Michael Greenstone, the director of the Hamilton Project, a liberal research group, puts it, “Ethanol is largely farm support policy, not environmental policy.” Read the rest of this entry »

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June 23, 2011 at 12:20 pm

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American economic policy: Running out of road

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Although America’s recovery from recession is disappointingly slow, policymakers doubt the merits of another monetary or budgetary push

Jun 16th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] THIS month America will reach two economic milestones. The Federal Reserve’s “quantitative easing”, or QE—loosening monetary policy by buying bonds with newly created money—will draw to a close. And the recovery QE was designed to spur will reach its second anniversary.

Yet no one will be celebrating at next week’s meeting of the Fed, where officials are almost certain to reiterate that the $600 billion programme of bond purchases will end this month. For all the monetary and fiscal stimulus applied to the economy, the recovery has been a disappointment. Though the chance of renewed recession is slim, in a dreary rerun of last year a promising acceleration in hiring and spending is fizzling.

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June 16, 2011 at 1:22 pm

Americans and government: Has the Tea Party peaked? Some evidence

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Jun 16th 2011, 19:59 by G.I. | WASHINGTON

WHAT’S behind the Tea Party? Is it an affirmative embrace of 19th-century libertarianism and minimal government, or a reactionary rejection of Barack Obama and the serial interventions of the crisis and its aftermath? Almost certainly both, but I suspect the second dominates, judging by signs the movement is peaking. Read the rest of this entry »

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June 14, 2011 at 12:35 pm

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Monetary policy and rebalancing: Read this speech, then sell the dollar

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Jun 9th 2011, 19:53 by G.I. | WASHINGTON

BEN BERNANKE’S speech on Tuesday got all the attention, but the speech later that day by Bill Dudley, head of the New York Fed, is more intriguing. In it he analyses the macroeconomic origins of the global imbalances that precipitated the crisis and prescribes the policy path forward.

He does so in logical, crisp and accessible language. Mr Dudley is, however, still a central banker, which means he must be translated, especially when it comes to the delicate subject of the dollar. In a nutshell, Mr Dudley tells us that aggressively easy monetary policy is essential to both the cyclical recovery and to a structural rebalancing of the American economy away from consumption and toward exports. This process will go more smoothly for everyone if emerging market economies (EMEs) cooperate and let their exchange rates appreciate (i.e. let the dollar fall), but absent such cooperation, don’t expect the Fed to change course. Read the rest of this entry »

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June 9, 2011 at 3:52 pm

America’s bail-out maths: Hard-nosed socialists

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America’s loathed TARP may turn a profit. That could be a problem

Jun 9th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] THE federal government is bowing out as America’s most hated fund manager. On June 3rd the Treasury reached an agreement to sell the rest of its holdings in Chrysler, a carmaker, to Italy’s Fiat. Ten days earlier it began to sell its stake in American International Group (AIG) through a public offering of the insurer’s shares. General Motors has returned to the stockmarket (the government still owns 26% of it) and Ally Financial, a former financing arm of GM and Chrysler, will soon follow. In March the Federal Reserve began selling mortgage-backed bonds it inherited from AIG.

Nobody liked the bail-outs, not even the
rescued. Tim Geithner, who oversaw them first at the New York Federal Reserve and now as treasury secretary, this week quipped to bankers: “I’m glad to not have as much equity in all of you as a group anymore.” “So are we,” one shot back. The public was the most outraged, yet on a narrow reckoning of profit and loss, taxpayers have little cause for complaint.

The entire article is linked here.

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June 9, 2011 at 3:47 pm

The Fed, the budget and the economy: Policy fatigue

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Policymakers seem helpless in the face of bad economic news

Jun 9th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] WHEN America’s economic recovery stalled last summer, Washington swung into action. The Federal Reserve announced it would buy $600 billion of government bonds with newly printed money, pushing down long-term interest rates. Then, at the end of the year, Barack Obama struck an agreement with the Republicans to cut payroll taxes and extend unemployment benefits.

Economic history seems to be repeating itself, in part. A promising recovery is again sputtering as job growth, which averaged 220,000 from February through April, slumped to 54,000 in May. The unemployment rate rose to 9.1%, the second monthly increase in a row (see chart). The economy grew at just a 1.8% annual rate in the first quarter and probably only a little faster in the second. Though not a double dip that barely qualifies as a recovery.

The response from Washington, however, is quite different from last year.

The entire article is linked here.

Written by gregip

June 9, 2011 at 3:43 pm

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