America’s jobs report: Not swooning, not soaring

May 3rd 2013, 15:06 by G.I. | WASHINGTON, D.C.

WILL America be fourth time lucky? A better-than-expected jobs report for April has soothed fears that the economy was swooning, as it has in the spring or summer of each of the last three years. The relief sent the Dow Jones Industrial Average over 15,000 and the S&P 500 over 1,600 for the first time.

American bond markets: Term report

Regulators fret about the risk of a sudden rise in long-term bond yields

May 4th 2013  | Washington, DC |From the print edition

[Greg Ip] THE Federal Reserve has long acknowledged trade-offs in its efforts to revive growth with ultra-easy monetary policy. Now those trade-offs are getting starker. On April 26th America’s economy was reported to have grown by 2.5% on an annualised rate in the first quarter: stupendous by European standards, but less than expected. On April 29th underlying inflation slipped to just 1.1%. On May 1st the Fed duly said it would keep rates near zero, as it has since 2008, and keep buying $85 billion of government bonds a month, although it may vary the pace depending on the outlook for inflation and jobs.

The budget: Something for everyone

Barack Obama’s latest budget makes concessions to Republicans

Apr 13th 2013 | WASHINGTON, DC |From the print edition

[Greg Ip] WHEN negotiations over a grand bargain on America’s budget collapsed in December, Republican leaders vowed not to negotiate with Barack Obama again. But perhaps Mr Obama didn’t get the memo, because on April 10th he proposed a new budget crafted to lure Republicans back to the grand bargaining table.

Averting a shutdown: Continuing irresolution

A rare, but limited, bipartisan effort

Mar 23rd 2013 | WASHINGTON, DC |From the print edition

[Greg Ip] ORDINARILY, merely keeping the federal government from shutting down would not be cause for congressional self-congratulation. But the workmanlike and bipartisan fashion in which the Senate agreed to keep the federal government funded was a welcome respite from two years of nonstop partisan fiscal war. Of course, it fails to address any of the government’s longer-term budget issues, but there is nothing new about that.

Net benefits

How to quantify the gains that the internet has brought to consumers

Mar 9th 2013 |From the print edition

[Greg Ip] WHEN her two-year-old daughter was diagnosed with cancer in 1992, Judy Mollica spent hours in a nearby medical library in south Florida, combing through journals for information about her child’s condition. Upon seeing an unfamiliar term she would stop and hunt down its meaning elsewhere in the library. It was, she says, like “walking in the dark”. Her daughter recovered but in 2005 was diagnosed with a different form of cancer. This time, Ms Mollica was able to stay by her side. She could read articles online, instantly look up medical and scientific terms on Wikipedia, and then follow footnotes to new sources. She could converse with her daughter’s specialists like a fellow doctor. Wikipedia, she says, not only saved her time but gave her a greater sense of control. “You can’t put a price on that.”

Measuring the economic impact of all the ways the internet has changed people’s lives is devilishly difficult because so much of it has no price. It is easier to quantify the losses Wikipedia has inflicted on encyclopedia publishers than the benefits it has generated for users like Ms Mollica. This problem is an old one in economics. GDP measures monetary transactions, not welfare. Consider someone who would pay $50 for the latest Harry Potter novel but only has to pay $20. The $30 difference represents a non-monetary benefit called “consumer surplus”. The amount of internet activity that actually shows up in GDP—Google’s ad sales, for example—significantly understates its contribution to welfare by excluding the consumer surplus that accrues to Google’s users. The hard question to answer is by how much.

The Little Book of Economics: How the Economy Works in The Real World

Newly Revised & Updated for 2013 

“As much a guidebook for our times as an explainer of economics.”

–From the foreword, by Mohamed El-Erian, CEO of PIMCO

If you’re looking for an easy-to-read, authoritative and witty guide to the economy, then The Little Book of Economics: How the Economy Works in The Real World is for you. The first edition, released in the fall of 2010, won rave reviews (see below) from media, readers, teachers and financial professionals alike. I’ve now updated it with plenty of new material to cover developments in the global economy in the last two years. Among the changes:

• • Extensive new discussion of debt, deficits, fiscal stimulus and austerity

• • New detail and descriptions of the Federal Reserve’s unconventional monetary policy, including quantitative easing

• • A new chapter about currencies and the euro crisis

PLEASE READ ON FOR MORE EXPERT RECOMMENDATIONS AND A CHAPTER SUMMARY OR ORDER NOW FROM  AMAZON.COM.

Additional resources for readers of the Little Book of Economics

For readers of The Little Book of Economics I’ve put together this brief overview of books, organizations, blogs, articles and other resources for those who want to dive more deeply into particular subjects or acquire more expertise.  You can access it by clicking here.  I welcome suggestions for additions.

The economy: Waiting for the chop

The economy has survived austerity thus far this year thanks to housing, but the “sequester” could change that

Mar 2nd 2013 | WASHINGTON, DC |From the print edition

[Greg Ip] WHEN Barack Obama and the Republicans in Congress agreed on January 1st to let a payroll tax cut expire and tax rates rise on the rich, they rolled the dice with the economy. They in effect bet that America’s recovery was solid enough to withstand higher taxes and spending cuts, including a “sequester” due to take effect on March 1st. At 1.9% of gross domestic product, that is a contraction second only to that of Greece among rich countries this year (see chart 1).

At America’s biggest retailer, it looked at first like the gamble had not paid off. “Where are all the customers? And where’s their money?” one executive at Walmart said in an e-mail dated February 1st obtained by Bloomberg News. February sales to date “are a total disaster,” another wrote on February 12th.

But the company painted a less dire picture on February 21st, when it reported its earnings. While sales had indeed flattened out, the culprit was not, it appeared, tax increases, but delayed tax refunds (also a result of the January 1st legislation). Customers last year cashed $4 billion worth of income tax refunds at Walmart’s shops, but so far this year had cashed only about $1.7 billion. Presumably when the refunds come through in March, so will the usual spending they bring.

Central banks: Brave new words

Rich-world central banks explore more doveish strategies

Feb 23rd 2013 | TOKYO AND WASHINGTON, DC |From the print edition
[Greg Ip] FOR four years rich-world central banks have done their best to rejuvenate economies with conventional and unconventional monetary policy. Now, with short-term interest rates still stuck near zero and their balance-sheets stuffed with government bonds, the central banks of America, Britain and Japan are experimenting with a shift in approach: coupling monetary action with commitments designed to alter the public’s expectations of interest rates, inflation and the economy. The sense of change is reinforced by the prospect of new leaders at the Japanese and British central banks, and the increasing prominence of several doves at America’s.

A more doveish stance would entail tolerating higher inflation, at least temporarily, in pursuit of higher output: a significant shift given the primacy central banks have long given to low inflation. Bond investors have begun to price in higher inflation (see chart). But just how far each central bank is prepared to go is still uncertain.

In Japan, Shinzo Abe, the prime minister, has used the term “regime change” to describe the Bank of Japan’s (BoJ’s) agreement to raise its inflation target to 2% from 1%, and pursue it with unlimited asset purchases. There are expectations for even more forceful action once Masaaki Shirakawa, the current governor, and his two deputies depart on March 19th. Under Mr Shirakawa the BoJ bought lots more assets, but critics said he undercut the positive impact by repeatedly saying they were not enough to end deflation and by restricting the maturity of bonds the bank bought.

Mr Abe is expected to nominate Mr Shirakawa’s successor by the end of February. The three front-runners, in ascending order of doveishness, are Toshiro Muto, Haruhiko Kuroda and Kazumasa Iwata. The first two are former finance-ministry officials; Mr Muto and Mr Iwata are former deputy BoJ governors. The latter may be Mr Abe’s favoured choice, although Mr Kuroda, head of the Asian Development Bank, is considered to have the most global experience. In a recent interview with The Economist, he said the bank must do “anything and everything” to hit its 2% target.

But putting deflation-fighters at the helm may not overcome the bank’s inherent conservatism. Minutes of the bank’s January policy-board meeting showed some members had misgivings about their ability to hit the 2% target. Masamichi Adachi of J.P. Morgan says the new leaders may fail to deliver the aggressive easing that foreign investors seem to expect.

Mark Carney, who will become governor of the Bank of England in July, has fuelled hints of a regime change of his own, saying that central banks should regularly review how they achieve their policy goals and that in exceptional circumstances there might be a case for temporarily targeting nominal GDP (ie, output unadjusted for inflation). But he has yet to endorse that as an alternative. At a parliamentary committee on February 7th, he indicated support for simply allowing inflation to stay above target for an extended period.

Adam Posen, a former member of the bank’s monetary-policy committee who now heads the Peterson Institute for International Economics, a think-tank, says Mr Carney’s background does not suggest a radical break. Both the Bank of England and the Bank of Canada, which Mr Carney now heads, target 2% inflation but allow temporary deviations in support of growth. Inflation has run above the BoE’s 2% target for most of the past eight years. At its last meeting on February 7th the bank’s monetary-policy committee said it may continue to do so for two more years, yet a third of its members, including Sir Mervyn King, the outgoing governor, voted for more quantitative easing, or QE.

The Fed’s profits: The other side of QE

What happens when the Fed starts losing money

Jan 26th 2013 | Washington, DC |From the print edition

[Greg Ip] EVER since the Federal Reserve first started buying up financial assets back in 2008, some have fretted about taxpayer exposure. The private debt purchased by the Fed to prop up the financial system might sour. The government bonds it has bought with newly created money, a strategy dubbed “quantitative easing” (QE), could fall in value if interest rates rose.

The reality has been happier.