The Federal Reserve: Can you hear me now?

The Fed makes its views loud and clear

Jan 28th 2012 | WASHINGTON, DC | from the print edition

 JAPAN holds the modern record for years spent with interest rates at zero; they were on the floor from 2001 to 2006. America is on track to break that record. Having cut its short-term rate to near zero in late 2008, the Federal Reserve said on January 25th it will probably stay there “at least through late 2014”, more than a year longer than its previous guidance.On the same day the Fed for the first time published projections of the year individual members of the Federal Open Market Committee, its main policymaking body, expect the federal-funds rate to start rising and the path it would follow over the next three years. The median forecast for a rise in interest rates is 2014 (see chart) but the accompanying statement implies it will probably be later.The Fed also took the long-awaited step of announcing an explicit inflation target—something that many other central banks adopted years ago and that the Fed chairman, Ben Bernanke, has long advocated. The central bank said it prefers inflation of 2%, also the target (or the midpoint in a target range) of the British, Canadian, Swedish and Israeli central banks.

Austerity and the markets: The perils of prudence

More evidence that austerity can backfire

Jan 28th 2012 | WASHINGTON, DC | from the print edition

[Greg Ip] THE fiscal hawks should be pleased. For all the hand-wringing about public profligacy, budget deficits across the rich world fell by about 1% of GDP last year. Moreover, that was almost all the result of policy actions (spending cuts and tax rises) rather than cyclical effects.Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year, the International Monetary Fund said on January 24th. But this may not be good news. Austerity can unnerve markets, not calm them.

American energy trends: Less of a menace from oil

Jan 23rd 2012, 22:35 by G.I. | WASHINGTON

 If I had to pick the economy’s likeliest spoiler this year, it would be oil prices. Whether it’s Iran trying to close the strait of Hormuz or the Arab Spring  wafting through Saudi Arabia, I have no idea; but nothing matches the track record of oil in delivering nasty economic surprises.But over the long run, something important is happening to the role of imported oil in the American economy: it’s shrinking. This comes through quite strikingly in the outlookreleased today by America’s  Energy Information Administration. The remarkable expansion of U.S. production from shale gas and unconventional oil sources such as the Bakken formation in North Dakota are relatively well known. There is, however, less awareness that American consumption is barely growing (see the nearby chart). The EIA has sharply revised down how much liquid fuel it reckons America will consume in 2035, to 20m barrels a day, from 22m it projected last year, which would be below the 2005 peak. Couple that with rising domestic production, and America will rely on net imports for just 36% of its liquid fuel needs in 2035, compared to 60% in 2005.

American energy trends: Less of a menace from oil

Jan 23rd 2012, 22:35 by G.I. | WASHINGTON

IF I had to pick the economy’s likeliest spoiler this year, it would be oil prices. Whether it’s Iran trying to close the strait of Hormuz or the Arab Spring wafting through Saudi Arabia, I have no idea; but nothing matches the track record of oil in delivering nasty economic surprises.

But over the long run, something important is happening to the role of imported oil in the American economy: it’s shrinking.

Income inequality: Who exactly are the 1%?

The very rich in America increasingly work in finance, marry each other and care passionately about politics

Jan 21st 2012 | from the print edition

 [Greg Ip]MITT ROMNEY is not the first multi-millionaire to seek the presidency, nor the richest. Ross Perot, the record-holder, spent some of his billions earned from computer data on losing bids in 1992 and 1996. Since then men who owe their or their family’s fortunes to oil, sport, publishing, trial law, ketchup, beer and bestselling autobiographies have followed.

But Mr Romney, who earned his $200m or so as a private-equity executive buying and selling companies, is the first candidate from the world of high-octane finance. As such, he illustrates the changing complexion of America’s rich. The wealthiest 1% of Americans not only get more of the pie (see chart); they are increasingly creatures of finance.

The average household income of the 1% was $1.2m in 2008, according to federal tax data. The ultra-rich skew that average upwards: admission to the 1% began at $380,000 in 2008. The Congressional Budget Office puts the cut-off lower, at $347,000 in 2007, or $252,000 after subtracting federal taxes and adding back transfers. Measured by net worth, rather than income, the top 1% started at $6.9m in 2009, according to the Federal Reserve, down 23% from 2007.

Taxing the rich in America: The politics of plutocracy

America’s rich should pay more, but there is no need to raise their income-tax rates

Jan 21st 2012 | from the print edition

 IN AN ordinary American presidential election, a candidate who had earned a fortune in business and then paid an absurdly low tax rate would barely raise eyebrows. Americans have long considered wealth something to admire and pursue, not vilify and redistribute. Alexis de Tocqueville said he knew “of no country…where a profounder contempt is expressed for the theory of the permanent equality of property.”

But this is no ordinary election. That so much scrutiny has fallen both on how Mitt Romney earned his fortune (in the ruthless world of private equity) and his tax rate (15%, less than what some middle-class families pay) is a sign something has changed. For that, credit a decade in which the median family in America saw its real income fall by 7%, even as the top 1% grabbed a share of national income unseen since the 1920s (see article), and a level of unemployment that, though falling, remains troublingly high. Not many Americans like the tactics or fashion choices of Occupy Wall Street, but quite a few share the movement’s opinion that the economy is tilted in favour of the wealthy.

And so the rich are now a campaign issue. Barack Obama calls for “millionaires and billionaires” to “pay their fair share”: introduce a minimum tax rate on millionaires and return the top income-tax rate to 39.6% from 35%, and the other 98% of Americans would not have to pay more, he claims. Republicans shoot back that raising any taxes would destroy jobs and business confidence. They think you can fill the budget hole by spending cuts alone; many want to cut taxes further.

Neither side is talking sense. America’s rich should indeed pay more tax; but marginal rates should not go up.

History shows that deficit reduction works best when most of the burden falls on spending cuts. That means that middle-class entitlements will have to be reduced, no matter what Mr Obama tells his supporters. But, just as in every other budget squeeze, a portion must come from higher taxes, no matter what the Republicans say.

Democrats say only the top 1% need pay more; that’s misleading. Others will have to pay too. But more of the increase should be shouldered by the rich who have done so well from recent trends. Technological change and globalisation have sharpened demand for the most skilled workers, in particular superstars, be they athletes or hedge-fund managers, thus sharply increasing inequality. Tax policy has exacerbated this trend instead of mitigating it. George Bush junior slashed top income-tax rates as well as rates on dividends and capital gains, which explains why Warren Buffett and Mr Romney have such low tax rates.

Follow the money

However, restoring the top income tax rates, as Mr Obama proposes, is not the best way of extracting extra revenue from the rich. It would raise revenues of about 0.3% of GDP and do nothing to make America’s grotesquely complicated tax system more efficient. It would be far better to close or limit loopholes and deductions, currently worth up to 7% of GDP, which distort behaviour (by, for example, encouraging people to take out big mortgages) and mostly benefit the affluent. Some deductions, including mortgage relief, would have to be phased out in stages; but many could go immediately. In a similar way, equalising the rates on capital, dividends and ordinary income would make it possible to lower America’s corporate tax rate, currently one of the rich world’s highest.

The result would be lower rates, more revenue and a more efficient and progressive tax system. If that’s where the debate about wealth ends, it will have been worth it.

The original article is linked here.

Natural disasters: Counting the cost of calamities (feature article)

Death rates from natural disasters are falling; and fears that they have become more common are misplaced. But their economic cost is rising relentlessly

Jan 14th 2012 | ROTTERDAM, NETHERLANDS AND WASHINGTON, DC | from the print edition

[Greg Ip] THE world’s industrial supply chains were only just recovering from Japan’s earthquake and tsunami in March when a natural disaster severed them again in October. An unusually heavy monsoon season swelled rivers and overwhelmed reservoirs in northern Thailand. The floodwaters eventually reached Bangkok, causing a political crisis as residents fought over whose neighbourhoods would flood. But before that the economic toll was being felt farther north in Ayutthaya province, a manufacturing hub. The waters overwhelmed the six-metre-high dykes around the Rojana industrial estate, one of several such parks that host local- and foreign-owned factories.

Honda’s workers rescued newly built cars by driving them to nearby bridges and hills. The factory ended up under two metres of water and is still closed. Honda was hardly alone: the industrial estates that radiate out from Bangkok are home to many links in the world’s automotive and technology supply chains. Western Digital, a maker of computer disk drives which has 60% of its production in Thailand, had two of its factories closed by the floods, sending the global price of drives soaring.

Thailand is no stranger to floods. Europeans once called Bangkok the “Venice of Asia”. But rarely have they done so much economic damage. October’s deluge cost $40 billion, the most expensive disaster in the country’s history. J.P. Morgan estimates that it set back global industrial production by 2.5%.

Such multi-billion-dollar natural disasters are becoming common. Five of the ten costliest, in terms of money rather than lives, were in the past four years (see map). Munich Re, a reinsurer, reckons their economic costs were $378 billion last year, breaking the previous record of $262 billion in 2005 (in constant 2011 dollars). Besides the Japanese and Thai calamities, New Zealand suffered an earthquake, Australia and China floods, and America a cocktail of hurricanes, tornadoes, wildfires and floods. Barack Obama issued a record 99 “major disaster declarations” in 2011.

Read the entire article, linked here.

Natural disasters: The rising cost of catastrophes (editorial)

How to limit the damage that natural disasters do

Jan 14th 2012 | from the print edition

 COMMERCE has long been at the mercy of the elements. The British East India Company was almost strangled at birth when it lost several of its ships in a storm. But the toll is rising. The world has been so preoccupied with the man-made catastrophes of subprime mortgages and sovereign debt that it may not have noticed how much economic mayhem nature has wreaked. With earthquakes in Japan and New Zealand, floods in Thailand and Australia and tornadoes in America, last year was the costliest on record for natural disasters.This trend is not, as is often thought, a result of climate change. There is little evidence that big hurricanes come ashore any more often than, say, a century ago. But disasters now extract a far higher price, for the simple reason that the world’s population and output are becoming concentrated in vulnerable cities near earthquake faults, on river deltas or along tropical coasts (see article). Those risks will rise as the wealth of Shanghai and Kolkata comes to rival that of London and New York. Meanwhile, interconnected supply chains guarantee that when one region is knocked out by an earthquake or flood, the reverberations are global.

(Read the entire editorial, linked here.)

Central banks: Crazy aunt on the loose

[Greg Ip] THERE was a time when the Federal Reserve wouldn’t say whether it had changed interest rates. Soon it will say where it thinks rates will be years from now. Beginning with its policy meeting on January 24th-25th, Fed officials will disclose when they expect to start raising their short-term interest-rate target, which is at near-zero now, and what they expect its path to be over the coming years. Behind such radical transparency is a grim fact: at the start of a fourth successive year of extraordinarily low short-term rates and a still-moribund economy, the Fed is desperate for new ways to stimulate demand.

It is not alone. Of the rich world’s four major central banks, Britain’s and Japan’s already have their policy rates stuck near zero and the fourth, the European Central Bank (ECB), is likely to get there this year. Meanwhile, the balance-sheets of all four institutions have ballooned as they expand the volume and range of assets and loans they hold (see charts).

Not normal: The recovery runs out of steam

Nov 17th 2011 | WASHINGTON, DC | from The World In 2012 print edition

 By Greg Ip, U.S. Economics Editor

If these were normal times, America’s economy would be on track for a reasonable, if restrained, expansion in 2012. Consumers and businesses are well on the way to rebuilding their finances, and the usual imbalances that presage a downturn are absent. But these are not normal times. The economy is hostage to policymakers in America and Europe who are all too capable of the wrong decision at the worst possible time. The resulting outlook is binary: either the economy beats the 2% consensus of private forecasters, nudging ­unemployment below 9% and Barack Obama to victory in the November election; or, less likely, bad luck and bad politics tip the economy back into recession and doom Mr Obama’s chances.

Recoveries after financial crises are typically subdued as banks, households and firms pay down the debts accumulated during the boom years (“deleveraging”). Even so, that permits many possibilities. Carmen and Vincent Reinhart, two economists, found that median per-head growth in the decade following five major crises was only about 2%. But the range was considerable: in Norway growth averaged 2.7%, in Japan just 0.6%..

America starts with one big disadvantage. In past crises, other countries filled the vacuum of shrinking private and government spending with increased demand for their exports. This time, though, most of the rich world is depressed.