The payroll-tax row: Backfiring brinksmen

The “tea party” loses a fight over economic stimulus

Dec 31st 2011 | WASHINGTON, DC | from the print edition

 [Greg Ip] SINCE the 2010 mid-term elections, “tea party” Republicans have enjoyed influence out of proportion to their numbers. They forced Barack Obama and congressional Democrats to accept spending cuts without any tax increases to keep the government from shutting down in April, 2011, and from defaulting on its bills in August.

This intransigence, however, backfired rather spectacularly just before Christmas when John Boehner, the speaker of the House of Representatives, was forced to reverse his earlier position and agree to an extension of a two-percentage-point cut in the payroll tax and to the payment of unemployment benefits for up to 99 weeks.

The payroll-tax row: Backfiring brinksmen

The “tea party” loses a fight over economic stimulus

Dec 31st 2011 | WASHINGTON, DC | from the print edition

 SINCE the 2010 mid-term elections, “tea party” Republicans have enjoyed influence out of proportion to their numbers. They forced Barack Obama and congressional Democrats to accept spending cuts without any tax increases to keep the government from shutting down in April, 2011, and from defaulting on its bills in August.This intransigence, however, backfired rather spectacularly just before Christmas when John Boehner, the speaker of the House of Representatives, was forced to reverse his earlier position and agree to an extension of a two-percentage-point cut in the payroll tax and to the payment of unemployment benefits for up to 99 weeks.

Economics focus: One nation overdrawn

Lessons for Europe from America’s history

Dec 17th 2011 | from the print edition

IN THE frantic race to save the euro, many Europeans have sought inspiration from the United States, perhaps the most successful monetary union in history. Germany’s council of economic experts has proposed a debt “redemption pact” modelled on the American federal government’s assumption of state debts in 1790. To European federalists, America demonstrates that monetary union cannot survive without fiscal union. And proponents of a European lender of last resort to insulate sovereigns from liquidity crises note how America can still borrow at 2% thanks to a deep and liquid government bond market backstopped by the Federal Reserve.

Look more carefully, however, and the American example is more complicated. Fiscal and currency union did indeed kick-start America’s early economic development. But fiscal and monetary frameworks were so rudimentary that they contributed little to nation-building.

America began life as a fiscal basket-case. The federal and state governments were deeply in arrears on loans taken out to finance their war for independence from Britain; federal debt traded at 50 cents on the dollar, state debt for 20 cents or less. Alexander Hamilton, the first Treasury secretary, considered it vital to America’s economic health to re-establish faith in the national credit.

China’s economy and the WTO: All change

In two articles, we examine how China has been altered by its entry into the WTO ten years ago. First, the economy.

[By Greg Ip and The Economist's Asia Economics Editor] THE World Trade Organisation (WTO), like many clubs, denies patrons the right of automatic readmission. Having quit the organisation’s predecessor shortly after the Communist revolution of 1949, China had to wait 15 long years to gain entry after reapplying in the 1980s. The doors finally opened on December 11th 2001, ten years ago this week.

The price of re-entry was as steep as the wait was long. China had to relax over 7,000 tariffs, quotas and other trade barriers. Some feared that foreign competition would uproot farmers and upend rusty state-owned enterprises (SOEs), as to some extent it did. But China, overall, has enjoyed one of the best decades in global economic history. Its dollar GDP has quadrupled, its exports almost quintupled.

The economy and stimulus: Looking up

The economy makes headway. So do efforts to renew stimulus

[Greg Ip] Dec 10th 2011 | WASHINGTON, DC | from the print edition

THREE months ago Barack Obama was firmly in the dock over news that no net jobs were created in August. Some gloomy people even saw a double-dip recession on the way.

America, it turns out, was not on the verge of recession, and it still isn’t. Subsequent revisions show that 104,000 jobs were in fact created in August. Later months have also been revised upwards, and in November payrolls grew by 120,000, or 0.1%. On December 2nd the government also reported that the unemployment rate had declined sharply to 8.6%, the lowest figure for two-and-a-half years, down from 9%.

 

November, it seems, was a very good month. Retailers reported solid sales on and after “black Friday”, the day after Thanksgiving on November 24th that marks the traditional start of the Christmas shopping season. Car sales were at their strongest since the days of the cash-for-clunkers subsidy programme, back in August 2009. Mortgage applications also ticked sharply higher.

The American economy is looking up in large part because it has been down for so long. The recent run of good economic data suggests that the economy is growing at around a 2.5% rate, roughly its long-term trend. That is fast enough to create jobs for a growing population, but not fast enough to reduce unemployment. Instead, the unemployment rate fell in November thanks to two unusual factors. First, the household survey, used to calculate the unemployment rate, has lately been recording stronger growth than the separate, better-known payroll survey; why, is unclear. Second, and more gloomy, a lot of people have left the labour force, reducing the number who are counted as unemployed. The share of working-age people in the labour market has fallen since the recession ended, holding the unemployment rate down for the wrong reasons.

The American economy: A very good week

Dec 2nd 2011, 14:10 by G.I. | WASHINGTON

 PERHAPS it’s time to dial back some of the gloom. This week gave us positive news on two fronts. First, the underlying American economy seems to be in reasonably good shape. Second, the biggest risks hanging over the economy—policy errors in America and Europe—receded just a bit. It is not time to declare the all clear. This recovery, having disappointed so many times before, probably will again at some point.

But for now, let’s look at  the positive case.

American banks: Contagion? What contagion?

American banks have been strangely immune to Europe’s crisis

[Greg Ip] Dec 3rd 2011 | WASHINGTON, DC | from the print edition

THE financial crisis of 2008 mowed down banks in America and Europe with equal abandon. Not so this year’s upheaval. European banks, struggling to fund themselves, are tightening credit. American banks are eager to lend, albeit not to Europe. Their loan growth this quarter will the fastest since mid-2008, reckons Nomura, a bank.

This is partly because America’s banks are reasonably healthy. They have significantly bolstered capital since 2008 and now boast core capital of 9% of assets, well above regulatory requirements. While many European banks held dangerous quantities of American mortgages in 2008, American banks today have relatively little exposure to Europe’s troubled sovereigns. For the five biggest, total exposure to Greece, Ireland, Italy, Portugal and Spain (net of hedges) ranges from $16 billion at Citigroup, or 14% of core capital, to $2.5 billion at Goldman Sachs, or less than 5%, according to Peter Nerby of Moody’s, a credit-rating agency. (But if France gets into trouble, that would be a far bigger problem.)

Yet the least appreciated virtue of America’s banking system is that it is drowning in dollars, the byproduct of the Federal Reserve’s efforts to kickstart the economy through “quantitative easing”.