Be bold, Mario

The European Central Bank should learn from the success of unconventional policies in America and Britain

Aug 23rd 2014 | From the print edition

CENTRAL bankers from around the world gather this week in the foothills of the Teton mountains to hike trails and share gossip and ideas. It is an apposite time to swap notes: the rich world’s economies have taken divergent paths and the bankers at Jackson Hole have much to learn from one another about which policies work best.

In America and Britain, output and employment have surpassed their pre-crisis peaks and are growing solidly. But the picture in the rich world’s other two big economies is darker. In the second quarter Japanese output shrank sharply, largely because consumers had accelerated purchases in the first quarter in order to avoid a consumption-tax rise. The euro zone’s woes are harder to dismiss: second-quarter output was flat, and it remains no higher than it was in 2011.

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How to stop the inversion perversion

Restricting companies from moving abroad is no substitute for corporate-tax reform

 

Jul 26th 2014 | From the print edition

ECONOMIC refugees have traditionally lined up to get into America. Lately, they have been lining up to leave. In the past few months, half a dozen biggish companies have announced plans to merge with foreign partners and in the process move their corporate homes abroad. The motive is simple: corporate taxes are lower in Ireland, Britain and, for that matter, almost everywhere else than they are in America.

In Washington, DC, policymakers have reacted with indignation. Jack Lew, the treasury secretary, has questioned the companies’ patriotism and called on Congress to outlaw such transactions. His fellow Democrats are eager to oblige, and some Republicans are willing to listen.

The proposals are misguided. Tightening the rules on corporate “inversions”, as these moves are called, does nothing to deal with the reason why so many firms want to leave: America has the rich world’s most dysfunctional corporate-tax system. It needs fundamental reform, not new complications.

Higher rates can wait

In both Britain and America financial excesses are best countered with rules, not with interest rates

Jun 21st 2014 | From the print edition

INVESTORS lulled into believing that low interest rates would last for ever got a cold dose of reality this month. First, Mark Carney, the governor of the Bank of England, told an audience in the City that rates could rise “sooner than markets currently expect”. Now America’s Federal Reserve, which like the bank has kept rates near zero for more than five years, has signalled its intention to keep them there at least until next year; but it too faces ever louder calls, including some from its own officials, to abandon that pledge (see article).

Advocates of fast action worry that rates left near zero for too long will cause inflation to accelerate in both countries. And they fear that even if prices stay quiescent, too much cheap money for too long is inflating asset bubbles: their eventual popping will create another financial crisis. These worries are not unfounded. But they are exaggerated.

Start with inflation. At 1.5% in Britain (the lowest rate in four and a half years) and 1.6% in America, it is below the 2% target of both countries’ central banks. Of course, central bankers should fret not about today’s inflation but tomorrow’s, and the vigour of Britain’s recent growth means the country’s spare capacity is disappearing: unemployment has dropped to 6.6% from 7.8% a year ago. But there is no pressure on wages. In America, the price picture is even more benign: the slack is greater, and inflation has been below target for two years. As in Britain, meagre pay rises give no hint of a wage-price spiral.

What about financial instability? Froth is certainly evident. In Britain the main exhibit is house prices, which have surged by 10% in the past year, overtaking pre-crisis levels. Household debt is also on the rise. In America the appetite for risk is most obvious in the fixed-income market: loans to highly leveraged companies this year are on track to match last year’s record-breaking $1.1 trillion. A third of these loans lack the usual covenants that ensure borrowers can repay the money.

Give surgery a try

These excesses are worrying, especially given the wretched history of the 2000s, when the Fed stood by as an enormous housing bubble inflated. Yet higher rates now are the wrong response to the latest signs of excess, for three reasons.

First, the excesses are still small, compared with those that brought down the global economy in 2007. Britain’s housing bubble is largely limited to London. And in both Britain and America banks sit on thicker cushions of capital and liquidity, making them less vulnerable to any downturn in asset prices.

Second, central bankers and their fellow regulators can treat financial excess far more surgically today by using “macroprudential” tools rather than the blunt instrument of interest rates. The starting-point with mortgages is usually limiting loan-to-value and debt-to-income ratios, but, importantly, allowing some flexibility for the riskiness of various borrowers. (Canada, for instance, is stricter with buy-to-rent investors than with homeowners.) Banks can also be compelled to hold more capital and liquidity against risky loans. And to the extent that macroprudential measures slow down the growth of assets, debt and wealth, they delay the need to raise interest rates, so safer loans remain cheaper for longer.

Third, the danger of raising interest rates to dampen down asset prices is much bigger now than it was ten years ago, because rates are near zero. Premature monetary tightening could push the economy back into recession and turn inflation to deflation. The result would be to send interest rates back to zero for even longer.

To be sure, macroprudential controls are untested. Applied too roughly, without allowing for the creditworthiness of borrowers, they too could be fairly blunt. But they are a better first line of defence against bubbles than just raising interest rates. Central banks would end up creating far more financial instability if, in their zeal to deflate bubbles, they kill the recoveries they have so carefully nurtured. Better, for the moment, to leave interest rates alone.

The original article is linked here.

The global economy: Phoney currency wars

The world should welcome the monetary assertiveness of Japan and America

Feb 16th 2013 |From the print edition
OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.

Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).

The next fiscal fight: From cliff to ceiling

The debt ceiling in America serves no useful purpose and should be abolished

Jan 12th 2013 | from the print edition

AMERICA sidestepped one fiscal disaster at the turn of the year when Barack Obama and Congress agreed to keep most tax rates from rising. A much bigger one is as little as five weeks away, when the Treasury Department runs out of legal authority to borrow. Failure to raise the “debt ceiling”, Mr Obama has warned, would force the government to default on its obligations. Republicans say they need some sort of leverage to drag a spendthrift president to the negotiating table. They have a point, but the debt ceiling is a dangerous tool with which to make it.

America’s taxes: Higher taxes the easier way

Setting a cap on deductions is a better starting point than raising tax rates

Nov 17th 2012 | from the print edition

[Greg Ip] AMERICA’S presidential election was supposed to be a head-clearing referendum on the size of government. It was not: voters split their vote, giving Barack Obama a second term and Republicans in the House of Representatives another big majority. Yet in one respect the election has clarified matters. Mr Obama has long argued that repairing America’s finances will require raising more tax as well as cutting spending. Influential Republicans, most importantly including John Boehner, the Speaker of the House, now appear to agree.This comes not a moment too soon. In less than two months America will reach a “fiscal cliff”, when George W. Bush’s tax cuts will expire and automatic spending cuts will take effect (seearticle). The economy could suffer a fiscal tightening of as much as 5% of GDP over a full year, easily enough to bring on recession.

America’s economy: Cliffhanger (leader)

Ben Bernanke has done his bit to help the American economy. Now the politicians must do theirs

Sep 22nd 2012 | from the print edition

EVEN by the standards of a weak recovery, America’s economy has looked frail lately. Growth has sunk below 2%. Unemployment is stuck above 8%. Factory activity seems to be shrinking. Yet there is no mistaking the green shoots of optimism, in particular on Wall Street: the stockmarket has hit its highest level since 2007. Consumer confidence is edging up, and along with it approval of Barack Obama, raising his odds of re-election even before Mitt Romney’s gaffes (see article).

Give credit to central bankers and their printing presses for the improving mood.

Emerging markets: The great slowdown

A sticky spell for the emerging world carries warnings for its long-term growth

Jul 21st 2012 | from the print edition

IN THE past decade emerging markets have established themselves as the world’s best sprinters. As serial crises tripped up America and then Europe, China barely broke stride. Other big developing nations paused for breath only briefly. Investors bet heavily that rapid growth in emerging markets was the new normal, while leaders from Beijing to Brasília lectured the world on the virtues of their state-centric economic models.

Lately, though, the sprinters have started to wheeze. Last week China reported its slowest growth in three years (see article). India recently recorded its weakest performance since 2004. Brazil has virtually stalled. This week the International Monetary Fund sharply cut its growth forecast for three of the four so-called BRICs; only Russia was spared (and even there growth is vulnerable to falling energy prices). Some investors darkly recall the developing world’s crisis-prone history and wonder whether the worst is yet to come.

No crisis looms, but serious concern is justified, for the emerging world faces two distinct risks: a cyclical slowdown and a longer-term erosion of potential growth. The first should be reasonably easy to deal with. The second will not.

Revival of the fittest

By rich-world standards, the emerging markets are still doing exceedingly well. The IMF still reckons developing economies will grow by 5.6% this year. Moreover, this deceleration is partly intentional. When the global financial crisis struck, emerging economies responded energetically: China launched a huge stimulus, Brazil’s state-owned banks lavished credit, interest rates were slashed. They succeeded so well that by 2010 they were forced to reverse course. To squash price pressures they raised interest rates, curbed speculation and allowed their currencies to appreciate. With a lag, that tightening has had the predicted result.

The American economy: Comeback kid

America’s economy is once again reinventing itself

Jul 14th 2012 | from the print edition

[Greg Ip]

ALMOST the only thing on which Barack Obama and Mitt Romney, his Republican challenger, agree is that the economy is in a bad way. Unemployment is stuck above 8% and growth probably slipped below an annualised 2% in the first half of this year. Ahead lie the threats of a euro break-up, a slowdown in China and the “fiscal cliff”, a withering year-end combination of tax increases and spending cuts. Mr Obama and Mr Romney disagree only on what would make things worse: re-electing a left-wing president who has regulated to death a private sector he neither likes nor understands; or swapping him for a rapacious private-equity man bent on enriching the very people who caused the mess.

America’s economy is certainly in a tender state. But the pessimism of the presidential slanging-match misses something vital. Led by its inventive private sector, the economy is remaking itself (see article). Old weaknesses are being remedied and new strengths discovered, with an agility that has much to teach stagnant Europe and dirigiste Asia.

America’s budget woes: Shift this cliff

Politicians love postponing problems. America’s budget is a rare case where it makes sense to do so, briefly

Jun 16th 2012 | from the print edition

WHEN quarrelling politicians got into a deadlock in 2010 and again last year over how to close America’s gaping budget deficit, they picked the easy way out. They applied temporary patches that would expire after this November’s presidential and congressional elections.

For the political parties, this made sense. Then as now, they seemed incapable of compromise. Democrats were hostile to spending cuts; Republicans as fond of tax increases as they were of flag-burning. Rather than moderate their views, both sides preferred to fight it out during an election campaign.

For the country, however, the strategy has been costly. The temporary patches postponed a premature fiscal tightening, but created a fiscal “cliff” at the end of this year. It included the reimposition of the taxes that George W. Bush cut, an increase (in effect) in payroll taxes and a string of across-the-board spending cuts (“sequesters”). You do not have to be Sherlock Holmes to see that wrestling on a cliff-edge is dangerous.

Altogether America is set to see a fiscal tightening equivalent to some 5% of GDP. That is easily enough to tip the economy, which is expected to grow by 2.2% this year, back into recession. Around the same time, the Treasury’s legal authority to keep borrowing more will run out. The last time Congress squabbled over raising this “debt ceiling”, one credit-rating agency stripped America of its precious AAA rating, spooking the markets. With the euro wobbling and emerging markets slowing, businesses are fearful. The cliff adds another huge uncertainty, discouraging companies from investing or hiring until they can see the future more clearly (see article).

Numerous Republicans, Democrats and this newspaper have repeatedly argued that the solution is a grand bargain that raises taxes, preferably through base-broadening reform, and curbs the growth of entitlements (ie, public spending on health care and pensions). This is also the formula that Barack Obama and John Boehner, the leading Republican in the House of Representatives, toyed with last year, before the deal fell apart.

Time to buy time

The best solution by far would be to agree on some version of this grand bargain sooner rather than later.