Greg Ip

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

Archive for May 2011

The defence budget: In the firing line

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The Pentagon starts to grapple with spiralling health-care costs

May 26th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] AMERICAN soldiers, as their recent dispatch of Osama bin Laden demonstrates, may well be the world’s best.
Unfortunately for their cash-strapped paymaster, they are very expensive. After languishing in the 1980s, military compensation has, since the mid-1990s, steadily outstripped that of civilians (see chart). This month Robert Gates, Barack Obama’s outgoing defence secretary, launched a review of Pentagon spending. He warned in a speech on May 24th that pay, pensions and health care would all need to be restructured, or they would crowd out the purchase of vital new weapons.

Military benefits, from subsidised food and education to free college tuition, have traditionally been used to enhance the appeal of a job that involves, at the best of times, limited freedom and frequent moves and, at worst, being killed. But with the exception of the army during the worst years in Iraq, the armed forces consistently meet or exceed their targets for recruitment and retention.

 The entire article is linked here.

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May 26, 2011 at 12:00 pm

The politics of Medicare: Medicare has a lemons problem

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May 25th 2011, 21:53 by G.I. | WASHINGTON

THERE are many problems with Paul Ryan’s budget and his plans for Medicare, but for Democrats, one is paramount: it is unpopular. His proposal initially put Democrats on the back foot, but within days they took heart as press commentary and polls turned negative. Mr Ryan’s plan, they concluded, was an electoral gift. That culminated in the upset victory by Kathy Hochul, a Democrat, in a predominantly Republican New York district in a special congressional election rightly seen as a referendum on RyanCare.

At the Peterson Foundation’s fiscal summit this morning, Mr Ryan complained that Democrats “are shamelessly demagoguing and distorting” his budget. It’s hard not to smile. As James Kwak thoughtfully reminds us with some choice press releases from Mitch McConnell, this is precisely how Republicans captured the elderly vote in last November’s midterms. Old folks, they said, would have their care rationed, and treatment decisions left to a cruel committee of unelected bureaucrats (the Independent Payment Advisory Board, which they have vowed to repeal).

Mr Ryan’s critics, however, should curb their schadenfreude. Read the rest of this entry »

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May 25, 2011 at 11:51 am

Economics Focus: The Service Elevator

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Can poor countries leapfrog manufacturing and grow rich on services?

May 19th 2011 | from the print edition

[Greg Ip]

INDIA’S services revolution has dazzled businesses in the rich world, turning Indian companies into global competitors and backwater cities such as Hyderabad into affluent, sophisticated technology centres. Yet economists have been less star-struck, clinging to the received wisdom that has prevailed since the industrial revolution: modernisation runs from agriculture through manufacturing and only later to services. Now some have broken ranks.

The logic supporting the conventional path towards an advanced economy is straightforward. Development typically involves moving workers from low-productivity activities such as subsistence farming to high-productivity sectors. That points to a shift into manufacturing because it lends itself to specialisation and economies of scale, both essential for rising output per worker. As first Japan, then Taiwan and South Korea, and now China have demonstrated, manufacturing can also accelerate development because its output can be exported to rich countries.

Services, in contrast, appear to be a graveyard for productivity. Because a haircut or a restaurant meal has to be delivered in person, there is almost no potential to exploit economies of scale and to export. People consume more services not when technological advance lowers their price but when they have reached a level of affluence that satisfies most of their other needs. Indeed William Baumol famously argued in the 1960s that as countries grew richer and their citizens became keener on buying services, their productivity growth would inevitably slow.

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That conventional wisdom is now under fire, in a book edited by Ejaz Ghani of the World Bank and a related article he wrote with Homi Kharas of the Brookings Institution and Arti Grover also of the World Bank on the VoxEU website. The authors argue that technology and outsourcing are enabling services to overcome their former handicaps. Traditional services such as trade, hotels, restaurants and public administration remain largely bound by the old constraints. But modern services, such as software development, call centres and outsourced business processes (from insurance claims to transcribing medical records), use skilled workers, exploit economies of scale and can be exported. In other words, they are just like manufacturing. If that is the case, then poor countries should be able to go straight from agriculture to services, leapfrogging manufacturing.

 For the entire article, click here.

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May 19, 2011 at 3:18 pm

American government debt: Bond market optimism should scare us

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May 16th 2011, 20:26 by G.I. | WASHINGTON

TODAY, Treasury reached its debt ceiling and began emergency manoeuvres to gain a few months before running out of borrowing room. Most everyone agrees that failure to raise the debt ceiling before that happens would be a calamity. Tim Geithner, the Treasury secretary, has just  warned for the umpteenth time that it would lead to “ catastrophic far-reaching damage”, sending interest rates skyrocketing and unleashing chaos on the American economy and the financial system. Read the rest of this entry »

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May 16, 2011 at 4:33 pm

The budget: The Blair House Project

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The White House and Republicans agree on where to go. They now have to work out how to get there.

May 12th 2011 | WASHINGTON, DC | from the print edition

BUDGET-MAKING in America is an exercise in brinkmanship. Last December Barack Obama and Republican leaders in Congress narrowly avoided a sharp rise in tax rates. Last month they averted a government shutdown with barely an hour to spare. They returned to the table on May 5th with another deadline looming: they must raise the ceiling on the national debt by August, or else make the federal government default on its obligations.

Judging by their public postures, the prospects look poor. On May 9th John Boehner, the Republican speaker of the House of Representatives, called for “trillions, not just billions” of spending cuts as a condition of raising the debt ceiling above its current $14.3 trillion. He suggested he would rather let the government default than fail to cut spending. Mr Obama’s spokesman responded that “maximalist positions do not produce compromise.”

The two sides may not be as far apart as the rhetoric suggests.

Read the entire article here.

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May 12, 2011 at 3:21 pm

The Budget Deficit and U.S. Competitiveness

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Guest article,  Council on Foreign Relations (

Greg Ip, U.S. Economics Editor, The Economist, May 6, 2011

Textbook economics tells us that government deficits eat up scarce savings, pushing up interest rates and the dollar. That discourages private investment and exports, a lethal combination for our productivity and competitiveness. The textbook does not apply to our current circumstance: Today’s deficit is occurring against a backdrop of deeply depressed private demand, which is evident from the fact that interest rates are so low. This argues against too rapid a cut in the deficit, because the Federal Reserve can’t compensate for fiscal austerity through lower interest rates.

At some point, though, the recovery will be more firmly established. Read the rest of this entry »

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May 6, 2011 at 4:35 pm

Posted in Uncategorized

Consumer borrowing: Taking credit

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Consumers tiptoe back towards borrowing, but not for houses

May 5th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

AMERICA’S economic recovery will soon be two years old, yet it remains disappointingly weak. That is due, more than anything, to the painful process of deleveraging, as banks and borrowers

work off a mountain of debt.

There are, however, glimmers of a turn-around. A survey released on May 2nd by the Federa

l Reserve found more banks easing standards for consumer loans than at any time since 1994.

And sure enough the figure for consumer loans excluding property has risen in recent months (see chart).

The data reveal telling cross-currents: rising confidence and incomes are delivering a boost to some forms of credit, even as a fundamental shift in attitudes, born of the recession, continues to chip away at America’s culture of borrowing.

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May 5, 2011 at 3:26 pm