Where did everyone go?

Demography may explain the weakness of America’s recovery

Mar 23rd 2013 |From the print edition
[Greg Ip] MILTON FRIEDMAN once compared the business cycle to an elastic string stretched on a board. How far the string is plucked determines how much it springs back; similarly, the depth of a recession decides the strength of recovery. America’s recent experience has not been kind to the plucking model. Although the recession was the deepest since the second world war, the recovery has been a disappointment. In the three years since the end of the recession in mid-2009, growth averaged 2.2%, barely half the 4.2% average of the seven previous recoveries.

In part, this is because recoveries from financial crises face greater difficulties. Consumers are too much in debt; businesses cannot or will not spend; a damaged banking system stifles credit. But in its annual economic report, issued on March 15th, Barack Obama’s Council of Economic Advisers argues that this is not the whole story. The plucking model presumes that after a recession, the economy returns to an underlying trend rate of growth that is determined by the supply of workers, capital and technology. Mr Obama’s economists argue that the trend is now much lower than in the past. The recovery, then, is not nearly as disappointing as it is often portrayed; Americans have set their sights too high.

Advertisement

The economy: Looking better

Some risks, but less fear, as the second term gets under way

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

[Greg Ip] WHEN Barack Obama took office four years ago, the economic figures were terrifying. A financial crisis and a savage recession were in full swing, and house foreclosures were soaring. As he was sworn in, panic about the banks sent the Dow Jones Industrial Average down more than 300 points. At the start of his second term, by contrast, the Dow hit a five-year high, while a widely followed index of investor fear called the VIX reached a near-six-year low (see table).

This change in mood is understandable. The financial crisis and recession ended more than three years ago. The housing market is firmly on the mend. Employment is growing. The euro zone, though feeble, is no longer about to collapse. And the threat of home-grown crisis appeared to recede when Republicans in the House forbore to use the threat of default to extract spending cuts. This week they voted to raise the Treasury’s statutory ceiling until May 18th; previously, the Treasury had expected to run out of borrowing authority as early as mid-February.

American growth vs. the world: At the top of an underperforming class

Dec 17th 2012, 22:13 by G.I. | WASHINGTON

[Greg Ip] FOR those who started out the year optimists on American growth (such as me), 2012 was sobering. It looks like America will end the year having grown about 2%, according to Deutsche Bank, marginally below the average pace since the recovery began in mid-2009.Why was it disappointing? In great part part because the rest of the world had an even worse year. Take a look at the nearby table. Of the world’s four major developed economies plus China, America was the only country to grow roughly as fast as the International Monetary Fund projected in the fall of 2011. Europe and the U.K. actually contracted, while China (and several other emerging economies) grew notably less briskly.

The cloud of uncertainty: Dithering in the dark

Quantifying the effect of political uncertainty on the global economy

Jun 16th 2012 | WASHINGTON, DC | from the print edition

[Greg Ip] EUROPE teeters at the edge of an economic abyss, its fate in the hands of political leaders at odds over how to solve the continent’s twin debt and bank crises. America may be pushed over a “fiscal cliff” at the end of the year by political dysfunction. And even China, although unlikely to take a deep dive, is hostage to the will and ability of its government to stimulate growth. More than at any point in recent history, the global economy’s fate is tied to the capriciousness of policymakers. How much does such uncertainty cost?

Anecdotal evidence suggests that it costs a lot. Customers of Cisco Systems, the world’s biggest maker of internet gear, are taking longer to make decisions, according to John Chambers, the company’s boss. Their orders tend to be smaller than before, and to require more in-house approvals. They say they are planning to buy more stuff later this year, reported Mr Chambers recently, but “then in the very next breath they say it depends on what happens on a global and macro scale.”

In Europe firms must reckon not only with recession but also with the risk that their investments may be redenominated in a different currency or locked in by capital controls. Robert Bergqvist of SEB, a Swedish bank, says that several Swedish corporate customers have put investment projects on hold because they don’t know how the euro crisis will unfold.

If America falls over the “fiscal cliff”, it would suffer a fiscal squeeze of 5% of GDP, easily enough to push the economy into recession. Last summer, as America’s government came perilously close to exhausting its legal authority to borrow, Barack Obama and Republicans in Congress could not resolve their fiscal differences. Instead, they kicked the can down the road, agreeing on huge automatic spending cuts that would start on January 2nd, just as all of George Bush’s tax cuts are due to expire, along with a separate temporary payroll tax cut.

Explaining America’s macro puzzles: The worst of all worlds

Mar 15th 2012, 21:08 by G.I. | WASHINGTON

[Greg Ip] America’s economy is a mosaic of puzzles and contradictions that has economists and bloggers scrambling for explanations and scrutinizing the data for quirks and flaws. Lately, I’ve been thinking dark thoughts: what if all it takes is a single explanation that assumes all the data are correct?

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.

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 economy’s prospects: Waiting for the earth to open

The usual accelerators of recession are absent—but so are the brakes

Aug 27th 2011 | WASHINGTON, DC | from the print edition

HOURS after an earthquake struck America’s east coast on August 23rd, office workers were still milling around the streets of Washington, DC and New York (above), nervously waiting for aftershocks. A similar watch over the economy is now under way. The earthquake that ripped through the American economy from 2007 to 2009 is still generating tremors. The latest may be the strongest yet. Since late July stockmarkets in America and round the world have nosedived, fearful that America is falling back into recession and that Europe’s debt crisis will drag down its banks.

America’s economy is certainly weak. It grew at an annualised rate of just 0.4% in the first quarter and 1.3% in the second. Future revisions may push both numbers into negative territory: the economy would have already double-dipped.

Much of that weakness may be traced to the run-up in oil prices that followed the Libyan uprising and to the Japanese earthquake and tsunami, which disrupted supply chains. As both shocks receded, economic activity turned up. An index of economic reports compiled by the Federal Reserve Bank of Chicago suggests that the economy grew in July (see chart 1), though it may since have flagged again.

Central banking and the crisis: Emergency manoeuvres

With developed economies in dire straits, central bankers have taken the tiller. Not all of them are happy about that.

Aug 13th 2011 | from the print edition

[Greg Ip]

COMETH the hour, cometh the central bankers. On August 8th the European Central Bank (ECB) began buying Italian and Spanish bonds in an effort to stop the sovereign-debt crisis from crippling two of the continent’s largest economies. And a day later America’s Federal Reserve made an unprecedented commitment to keeping interest rates at more or less zero for two more years to keep a stalling economy out of recession.

In both cases the dramatic steps were taken in the face of political failures to get to the heart of the problems at hand. The fact that they took both banks well outside their normal zones of operation was underscored by the internal dissent both moves faced, dissent rarely seen in the consensus-driven world of central banking.

The initial market reaction was positive, at least on one side of the Atlantic. Yields on Italian and Spanish bonds fell sharply relative to Germany’s. In America Treasury yields fell and stocks rose—but not for long, as equity markets fell again on August 10th. No one should see this as a fundamental turnaround. The ECB’s earlier bond-buying hasn’t saved smaller countries from punitively high government-bond yields; the Fed’s previous interventions haven’t spurred a robust recovery. The big issues of America’s stagnant economy and Europe’s debt crisis remain in the hands of elected politicians who still seem inadequate to the task. But at least central banks have shown themselves ready and able to act.

The entire article is linked here.

American economic policy: Running out of road

Although America’s recovery from recession is disappointingly slow, policymakers doubt the merits of another monetary or budgetary push

Jun 16th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] THIS month America will reach two economic milestones. The Federal Reserve’s “quantitative easing”, or QE—loosening monetary policy by buying bonds with newly created money—will draw to a close. And the recovery QE was designed to spur will reach its second anniversary.

Yet no one will be celebrating at next week’s meeting of the Fed, where officials are almost certain to reiterate that the $600 billion programme of bond purchases will end this month. For all the monetary and fiscal stimulus applied to the economy, the recovery has been a disappointment. Though the chance of renewed recession is slim, in a dreary rerun of last year a promising acceleration in hiring and spending is fizzling.