Greg Ip

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

Archive for February 2011

The deficit and the senate: The stealth deficit commission

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A group of senators breathes life back into the Bowles-Simpson budget report

Feb 24th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] WHEN a bipartisan commission released its sweeping plan to slash America’s budget deficit last December, it seemed destined for the morgue. Only 11 of the 18 commissioners voted for their own report, three short of the number needed to take the proposals to a vote in Congress. None of the three Republican members from the House of Representatives voted in favour. And Barack Obama himself, who had set up the commission, largely ignored its advice. Days later, he struck a deal with Republicans to add $858 billion to the deficit by extending some tax cuts and enacting other new ones.

Opposites attract

But the commission’s report is showing faint signs of life thanks to a quiet effort by what amounts to a second, stealth deficit commission.

The entire article is linked here.


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February 24, 2011 at 4:00 pm

The federal budget: Austerity Lite

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A feeble offering from the president; but there are a few signs of hope

Feb 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] FOR years America’s politicians have delivered only pious words about the deficit. With the financial crisis and the recession now in the rear-view mirror, this year was supposed to be the time when Barack Obama and Congress would shift towards austerity. The competing budget proposals of congressional Republicans and the president do contain hints that such a moment has arrived—but only by the sadly low standards of the current fiscal debate.

Mr Obama’s budget proposal, unveiled on February 14th, calls for $1.1 trillion in spending cuts and tax increases over the next decade. “Making these spending cuts will require tough choices and sacrifices,” he declared. Of the savings, $400 billion would come from freezing for five years the level of discretionary spending, excluding security. (Discretionary spending must be authorised annually by Congress.) To reach that target, Mr Obama calls for killing or shrinking some 200 programmes. Many are dear to his liberal base, such as heating subsidies for the poor and college grants for summer study, and their presence on the chopping block is meant to burnish Mr Obama’s fiscal credibility. Civil-service pay would be frozen for two years. As for security, the Pentagon’s budget would be cut by $78 billion over five years and spending on the wars in Iraq and Afghanistan reduced. Total discretionary spending would thus shrink to just 5.6% of GDP, which would be the lowest in at least 40 years.

Mr Obama’s budget proposal projects that the deficit will fall from a post-war record 11% of GDP in the current fiscal year to 3.1% by 2021. That would stabilise the debt, albeit at a still-lofty 77% of GDP. A stable debt ratio is the litmus test of a sustainable budget.

Sadly, a closer look suggests that the budget would have almost no chance of achieving this.

Written by gregip

February 17, 2011 at 5:33 pm

Central banks: A More Complicated Game

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The West’s financial crisis has shaken public confidence in its leading central banks. Yet it has also led to an expansion of their duties and powers

Feb 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] IN TWO days, two prominent central bankers, one on each side of the Atlantic, headed for the exit. Few people were surprised when Kevin Warsh tendered his resignation from the Federal Reserve on February 10th. Rather more people were taken aback when rumours started to fly that Axel Weber would stand down as president of Germany’s Bundesbank and thus rule himself out as the next president of the European Central Bank (ECB), a job for which he had been the front-runner. The rumours were confirmed on February 11th.

The timing was coincidental. Yet the two men have something in common. Both were uneasy about changes in the way that central banks conduct themselves—specifically, about the unprecedented forays into financial markets by the Fed and the ECB. Mr Weber publicly opposed the ECB’s decision last May to start buying the bonds of member countries’ governments. His colleagues, he believed, were intruding dangerously into fiscal policy. Mr Warsh, similarly though more quietly, fretted that the Fed’s policy of quantitative easing (QE)—the purchase of government bonds with newly printed money—was fomenting new imbalances in the global economy and steering the Fed into treacherous political waters.

Since the financial crisis in 2007 central banks have expanded their remits, either at their own initiative or at governments’ behest, well beyond conventional monetary policy. They have not only extended the usual limits of monetary policy by buying government bonds and other assets (see chart). They are also taking on more responsibility for the supervision of banks and the stability of financial systems. Their new duties require new “macroprudential” policies: in essence, this means regulating banks with an eye on any dangers for the whole economy. And their old monetary-policy tasks are not getting any easier to perform. Central banking is becoming a more complicated game.

The entire article is linked here.

The jobs market: Where are the Workers?

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Feb 10th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] WHEN America’s job market isn’t disappointing, it’s perplexing. Take the month of January, when a net figure of just 36,000 non-farm jobs was created. Even by the miserly standards of the current recovery, that was low.

But in the same month the unemployment rate tumbled to a 21-month low of 9% from 9.4% in December. Its drop since November, when it was 9.8%, is the largest over two months since the prosperous days of 1958. Which of these bits of news gives the truer picture?

One reason that America’s jobs figures often send mixed signals is that they are drawn from two separate surveys. In this case, the survey of employer payrolls was almost certainly affected by snowstorms that ravaged much of the east of the country and which economists estimate may have kept 60,000 to 150,000 people away from work.

The survey of households, from which the unemployment rate is derived, tells a far more optimistic story. It finds that employment has surged by 882,000, or 0.6%, in the past two months, after adjusting for new estimates of America’s population. This is more in keeping with other data, such as car sales and GDP, which suggest that the recovery is picking up steam.

Yet for several reasons the fall in unemployment should not be taken as evidence of a job market on a roll. Read the rest of this entry »

Written by gregip

February 10, 2011 at 5:42 pm

Inflation lessons from the Asian crisis

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Feb 9th 2011, 23:01 by G.I. | WASHINGTON

FOR those convinced that America is on the verge of becoming Weimar Germany, the high price of oil and gold are exhibits one and two. Often forgotten is the fact that both are traded in global markets and reflect global, not American, demand. Failing to appreciate the distinction can lead to policy mistakes. Just look at 1998.

A financial crisis tipped east Asia into a deep recession in 1997-98, which spread to Russia and then the United States via Long Term Capital Management. To cushion the spillover to America, the Fed first aborted a nascent monetary tightening cycle, then actually cut interest rates. It could do so in part because collapsing Asian demand crushed the price of oil, sending headline inflation below 2%. Read the rest of this entry »

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February 9, 2011 at 6:10 pm

America’s Housing Market: Suspended Animation

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Falling prices and rising foreclosures cause a policy quagmire

Feb 3rd 2011 | WASHINGTON, DC | from the print edition

WHEN the federal government took control of Fannie Mae and Freddie Mac, two teetering mortgage-finance agencies, in September 2008 it was meant to be temporary. Yet their surreal existence as shareholder-owned prisoners of the state looks likely to drag on for years.

Nobody is happy with the status quo. The federal government routinely guarantees 85% or more of newly issued residential mortgages, primarily through Fannie, Freddie, and the Federal Housing Administration (FHA). But withdrawing that support is impossible while the housing market is so fragile. The Treasury is scheduled to release a proposal for overhauling America’s housing-finance system as early as next week. But rather than resolve the status of Fannie and Freddie, it is likely to lay out several options, none of which is likely to become law any time soon.

The role of the FHA, which is to guarantee mortgages with low downpayments to families of modest means in return for a fee, is relatively uncontroversial. The big debate is to what extent the federal government should also guarantee mortgages to middle-class families. The Treasury’s options will include doing so through a stand-alone federal agency—perhaps a nationalised version of Fannie or Freddie—or by selling an explicit government guarantee for a fee to any lender, much as the Federal Deposit Insurance Corporation charges banks to insure their deposits. Read the rest of this entry »

Written by gregip

February 3, 2011 at 5:48 pm

Posted in Housing, Obama policy