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America's recovery
The pieces are falling into place
Apr 1st 2011, 16:48 by G.I. | WASHINGTON, DC
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TURN off the alarms. After several weeks when the data pointed to a recovery still struggling to achieve escape velocity, the March employment report provided reassuring evidence that, at a minimum, it is still gaining altitude.
Total payrolls excluding agriculture rose a hefty 216,000, or 0.2%, the biggest monthly gain since last May. Private payrolls advanced 230,000, and by 470,000 over the last two months, the biggest such gain in five years. Government employment continued to slide.
The unemployment rate, meanwhile, edged lower, to 8.8%, its fourth straight drop. It has now fallen a full percentage point since November. That’s a surprisingly fast drop, given the unimpressive pace of concurrent GDP growth of about 2% to 3% annualised. Two factors can explain the unusually rapid decline in unemployment. One is that the household survey used to calculate the unemployment rate shows much more rapid employment growth since November (1.4m) than the separate survey of establishments that yields payroll employment (630,000). Exactly why is a mystery.
The second reason for the rapid drop in unemployment is that the number of people either working or looking for work (the labour force) has not grown since November, which is a surprise: typically, you’d expect that the return of discouraged workers to the job hunt would buoy the ranks of the officially unemployed. The fact that it has not is, counterintuitively, a bad sign. March did provide a faint signal of improvement as the labour force grew 160,000. However, that’s only about as fast as the working-age population grew. The participation rate, the share of the working-age population in the labour force, remained stuck at 64.2%, the lowest since 1984. Economists keep expecting participation to rebound, which is one reason they were anticipating a higher, not lower, unemployment rate. The fact that participation refuses to rise is a troubling sign.
Manufacturing employment grew for the fifth straight month, continuing the factory sector’s encouraging rebound. Construction employment was flat, which isn't a surprise, and temporary employment, considered a leading indicator of permanent hiring, rose.
This report is solidly positive for the economy: bit by bit the pieces of recovery are falling into place. No doubt, it will reinforce expectations that the Federal Reserve should either call an early end to its quantitative-easing programme of bond purchases (now scheduled to end in June), or start raising interest rates soon. That indeed was the message a bevy of hawkish Fed presidents delivered in the past week.
That seems premature, for two reasons. First, other economic data is not as upbeat as employment. Recent reports on durable goods, housing and so on all suggest the economy is growing at just a 2% to 2.5% annual rate in the current quarter, well below the 3.5% to 4% rates that many forecasters were anticipating for the year as a whole. What explains the divergence? For one thing, while employers are hiring more workers, they haven’t added to their hours in recent months. Total hours worked grew at only a 2% annual rate in the first quarter. Another explanation might be that productivity growth has ground to a halt, which is neither surprising, given its rather feeble performance to date, nor bad. Nonetheless, in sum the data point to an economy growing at or slightly above its potential rate, but hardly surging, which is likely to be the pattern for the next several years while deleveraging proceeds apace. If underlying demand remains stubbornly sluggish, because of higher oil prices for example, employment could peter out again, as it did a year ago.
The other reason for caution is pay. Average hourly earnings were flat last month, and are up just 1.7% from a year earlier, half the rate at which they were growing before the recession. Inflation expectations have risen a bit, but there is no sign that workers have been able to leverage their concern about higher food and petrol prices into higher wages. The surge in oil prices is eating into disposable income and being felt in consumer spending.
There may be a case for the Fed to back away from its ultra-easy monetary stance sometime this year; however, it will take many more months of good economic news like today’s. The more dovish, and influential, William Dudley, president of the New York Fed, said as much today. “This is welcome and not a reason to reverse course,” he said. The economy, he noted, is performing much as the Fed expected. “We must not be overly optimistic about the growth outlook.” This recovery’s serial disappointments suggest he’s right.
Japan and the global supply chain
Broken links
The disruption to manufacturers worldwide from Japan’s disasters will force a rethink of how they manage production
Mar 31st 2011 | TOKYO | from the print edition
LAST year Iceland’s volcanic ash disrupted air transport across Europe and gave the world’s manufacturing supply chain one of its biggest tests since the advent of the low-inventory, just-in-time era. Now, Japan’s quadruple disaster—earthquake, tsunami, nuclear alert and power shortages—has put the supply chain under far greater stress. Three weeks after the massive quake, the extent and likely duration of the disruption are still unclear.
There are some enlightening similarities between the shocks that manufacturers are now suffering and those that buffeted the banking system in the 2008 financial crisis. In both cases two of the biggest surprises were the unexpected connections the crisis uncovered, and the extent of the contagion. The problems began in a seemingly well-contained part of the system—subprime mortgages in the case of finance, in manufacturing’s case a natural disaster in an economic backwater—but quickly spread.
Like the sudden evaporation of liquidity that the banks experienced, factories are finding that parts that had always turned up reliably have stopped coming. As with financial regulators’ discovery of how poorly they understood the “shadow banking” system and arcane derivatives contracts, manufacturers are discovering how little they know about their suppliers’ suppliers and those even farther down the chain. When Lehman went bust, other banks struggled to measure their exposure because Lehman turned out to be not a single institution but a tangle of many entities. Assembly firms are now finding that their supply chain looks much the same.
Just as some financial institutions proved “too big to fail”, some Japanese suppliers are now revealed to be too crucial to do without. For example, two firms, Mitsubishi Gas Chemical and Hitachi Chemical, control about 90% of the market for a specialty resin used to bond parts of microchips that go in to smartphones and other devices. Both firms’ plants were damaged. The compact battery in Apple’s iPods relies on a polymer made by Kureha, which holds 70% of the market, and whose factory was damaged.
Manufacturers around the world are now racing to secure supplies of the scarcest components and materials, pushing up their prices. Carmakers in Japan and America have had to scale back production. Toyota fears a scarcity of 500 rubber, plastic and electronic parts. It is not yet clear how much worse things will get as existing stocks run down. Nor can Japanese suppliers be sure yet of how soon they can get back up to speed: hundreds of aftershocks, some strong enough to disrupt production, have rumbled on since the main quake. Given the loss of a very large nuclear plant and shutdowns of others, power shortages may extend for years.
Even before the extent of the disruption becomes clear, it seems certain that Japan’s disaster will have a lasting impact on how manufacturers manage their operations, says Hans-Paul Bürkner, boss of the Boston Consulting Group, who was in Tokyo this week. “It is very important now to think the extreme,” he says. “You have to have some buffers.”
Over the past decade or so the just-in-time concept of having supplies delivered at the last minute, so as to keep inventories down, has spread down the global manufacturing chain. Now, say economists at HSBC, this chain may be fortified with “just-in-case” systems to limit the damage from disruptions.
For instance, suppliers who have near-monopolies on crucial parts and materials may be pressed to spread their production facilities geographically. Their customers may, as a precaution, also switch part of their orders to smaller rivals. Hiwin, a Taiwanese firm with 10% of the market for “linear motion guides”, used in industrial machines, may gain share from customers of Japan’s THK, which dominates the market with a 55% share and which faces power cuts, suggests CLSA, a stockbroker.
Assembly firms will be under the same financial pressures as before to keep their inventories of supplies down. So a new growth industry may emerge from the crisis: that of holding and maintaining essential stocks on behalf of manufacturers.
Industrial firms, having spent years becoming ever leaner in their production techniques and, in the process, making themselves more vulnerable to these sorts of supply shocks, will now have to go partly into reverse, giving up some efficiency gains to become more robust. One consolation is that their problem of “too crucial to do without” suppliers looks a lot easier to solve than the conundrum of the “too big to fail” banks.
The global economy
Another year of living dangerously
Turmoil in the Middle East and disaster in Japan arouse economic angst. Central banks must not make it worse
Mar 24th 2011 | from the print edition
THIS was supposed to be a stress-free year for the global economy. By January the financial crisis had faded and Europe’s sovereign-debt crisis seemed less acute. America’s economy was resurgent. Investors piled into equities and sold some of the government bonds they’d bought for troubled times. If there was a worry, it was that emerging economies would grow too quickly, inflating commodity prices.
The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy. How much of a setback to growth do these twin crises represent? And how should economic policymakers react to them?
Japan’s share of world output has been shrinking for decades, but at 9% it remains large enough for the hit to the country’s growth to subtract noticeably from global output. Then there are the ripple effects on the rest of the world. Japan is a large—in some cases the sole—supplier of intermediate goods to the world’s electronics and automotive industries, from the hardened glass on Apple’s iPad to gearboxes in Volkswagens. Many makers of such parts have had to slow or halt shipments because of damaged roads, power cuts or the loss of components from their own suppliers. The effects have spread well beyond Japan, causing shutdowns from South Korea to Spain. Still, the history of such disasters is that much of that lost production is eventually recovered and reconstruction delivers a fillip to subsequent growth.
Pinpointing the impact of Arab political turmoil is complicated by the fact that oil prices were already rising thanks to a brighter global economic outlook. Nonetheless, a good portion of this year’s 25% increase seems due to worries over supplies. A rule of thumb holds that a 10% increase in the price of oil trims 0.2 percentage points from global growth. At the start of the year, the world looked likely to grow by 4-4.5%. A crude estimate is that the two crises will subtract between a quarter and half a percentage point from that.
That may not capture the full effect. Crises by their nature generate clouds of uncertainty (see article). Businesses postpone capital spending and hiring until the clouds clear. Investors seek the safety of bonds and lose their taste for equities.
Economic policymakers can’t make peace between Arab rulers and their people or stabilise Japan’s nuclear reactors, but they can minimise the collateral damage. The greatest burden is on the Bank of Japan. Its efforts to cure deflation over the past 15 years have too often been timid. That could not be said of its rapid response to the tsunami. It poured cash into the banking system in a pre-emptive strike against panic hoarding. And it expanded its purchases of government and corporate debt and equities. Still more “quantitative easing” can keep bond yields from rising as the government borrows for reconstruction, and help the fight against deflation.
What should the rest of the world do? In a show of sympathy the G7 joined the Bank of Japan in selling the yen after it spiked dramatically. Such actions should be limited, however. Japan is too dependent on exports and its priority should be stimulating domestic demand and ending deflation, not cheapening the yen. A better way for outsiders to help is to ensure that concerns over radiation in Japanese products do not become an excuse for protectionism.
Avoidable aftershocks
Other central banks face a more complicated task. Even as higher oil prices and hobbled Japanese production reduce growth they add to mounting inflation risks (Britain is now fretting over inflation of 4.4%). But most rich-world economies have ample economic slack, and in several countries fiscal tightening will tug at recovery. Britain’s coalition government has reaffirmed its commitment to austerity with this week’s budget (see article), and America has begun to cut spending. Both the Bank of England and the Federal Reserve should resist the temptation to tighten soon.
The European Central Bank seems intent on raising interest rates next month. That would be a mistake. In the euro zone underlying inflation and wage growth are both subdued and inflation expectations are under control. By raising rates the ECB would strengthen the euro and frustrate the efforts of countries like Greece, Ireland and—the next in line for bailing out—Portugal to grow their way out of their debts.
There is only so much economic policymakers can do about crises that spring from war or nature. In this case, the priority should be not making matters worse.
Regional disparities
Gaponomics
Regional income inequality has risen in many countries. What should be done about it?
Mar 10th 2011
WATFORD GAP is geographically unremarkable but culturally iconic. The small dip between two hills in Northamptonshire is home to a motorway service station and marks the unofficial boundary between the north and south of Britain. In the popular stereotype, life on the other side of the Watford Gap is as foreign as life in a distant land.
That may not be far from the truth. An analysis by The Economist shows that regional income disparities have widened in several rich countries during the recession (see article), and are particularly big in Britain and America. The gap between Britain’s poorest regions (mainly in the north and Wales) and its richest (in the south-east) has widened for the past 20 years. It grew worse during the recent recession, and is likely to widen again as government budget cuts fall disproportionately on poorer regions. GDP per head in the poorest quarter of Britain’s regions is now lower than in the richest part of China.
Does this matter and, if so, what should be done about it? To most politicians the answer to the first question is self-evidently yes. “Slipping behind Shanghai” is hardly a vote-winning slogan. And all too often the answer to the second question has involved subsidies. The European Union’s “structural funds”, more than a third of the EU’s budget, are designed to shift cash from richer to poorer parts of the single market. America has pumped federal dollars into deprived regions such as Appalachia. Now Britain’s coalition government is dusting off Thatcherite ideas for boosting left-behind areas with tax breaks: on March 5th George Osborne, the chancellor, announced the creation of ten “enterprise zones” that will get preferential tax treatment and simplified planning rules.
Unfortunately, the record of such regional-development efforts is poor. Despite massive transfers, the gap in economic vibrancy between Italy’s richer north and its poorer south is still huge: only 40% of people in Calabria have a job, compared with 65-70% in Lombardy and Bolzano. Even policies that, in principle, should be helpful, such as improving infrastructure, are no panacea. West Virginia has masses of roads, but is still poor. And good intentions can backfire: “enterprise zones” and other regional tax incentives often shift jobs away from places that don’t get the subsidy, rather than create new ones.
Instead of obsessing about revitalising lagging regions, politicians would do better to focus on the people within them. A region’s prosperity is determined by its inhabitants’ productivity and thus by people’s skills, the scale of capital investment and the pace of innovation. These are bound to vary across regions. Cities are more productive than rural areas. But not all cities are equal: the characteristics that helped Manchester and Liverpool prosper in the 19th century, such as proximity to cotton mills and the sea, are less useful in the 21st century, when Britain’s strengths—in finance and other skilled services—decisively favour London and the south-east.
This points to a different set of policies. First, make it easier for people to move. Given inherent gaps in regional productivity prospects, there is a case for boosting mobility from declining regions to prospering ones. In Britain the main problem is the fetish for home-ownership and high house prices in the south-east, partly the result of severe shortages of supply. Easing planning restrictions below the Watford Gap would be a better way of helping Britons than propping up the north.
Second, focus on education. In Sunderland only 21% of adults have any form of higher education, compared with 39% of Londoners. Though there are other ways that the British government can help boost productivity—from strengthening infrastructure to cutting red tape—the single biggest reward will come from improving northerners’ educational performance. To be sure, the better-educated might then move. But they, and Britain as a whole, would be much better off.
China's economy
Decelerating
China’s government may at last be getting a grip on its banks
Mar 17th 2011
THE arrival of rain and snow on China’s parched northern plain has raised hopes that the country’s crop of winter wheat will fare better than feared. Food prices, which rose by about 11% in the year to February, have made a big contribution to China’s consumer-price inflation, now running at 4.9%. But if drought is responsible for some of China’s price pressure, a deluge of credit is to blame for the rest. So China-watchers were quick to welcome a turn in the monetary weather this week.
The country’s broad money supply (M2), which includes currency and a variety of bank deposits, grew by 15.7% in the year to February, slower than expected. Monetary aggregates are an important target for the People’s Bank of China (PBOC), the country’s central bank, much as they were for Western central banks in the heyday of monetarism. Unfortunately, these targets can be just as elusive in China as they proved to be elsewhere: M2 has exceeded the government’s intended limit in nine of the past ten years. But February’s figure will give the PBOC fresh hope of remaining within its 16% target for this year.
As well as targeting the money supply, China’s authorities also strive to set limits on credit. China’s banks added 535.6 billion yuan ($81.5 billion) of new loans last month, again a lower figure than expected. Their February lending was consistent with an annual total of 7.88 trillion yuan, according to calculations by Wensheng Peng of China International Capital Corporation. This is not too far above the 7.5 trillion yuan that Liu Mingkang, chairman of the China Banking Regulatory Commission, reportedly believes is consistent with the government’s monetary targets.
Not everyone puts much faith in these credit figures, however. Fitch, a ratings agency, has described how banks have moved lending off their books using a variety of dodges, such as packaging loans into securitised products with the help of lightly regulated trust companies. It estimates that China’s banks lent over 11 trillion yuan in 2009, far in excess of both the official figure of 7.9 trillion yuan and the official quota of 7.5 trillion yuan. Weaning China off these credit injections is not easy. The economy cannot get by with trillions less overnight without “seriously stunting growth,” Fitch wrote in December. “Hidden channels are likely to continue to fill this gap so long as demand remains high, supply tight, and oversight lenient.”
An alternative way to measure the availability of credit is simply to ask people. Market News International, a news agency owned by Deutsche Börse Group, regularly surveys 186 listed Chinese companies about the business conditions they face. In the main, business is still brisk, its February survey revealed. But companies also said that credit was as tight as it was in June 2008, when the authorities were battling against 7-8% inflation. This gap between business activity and constrained credit will close in due course, argues Peter Redward of Barclays Capital. And given that Wen Jiabao, the prime minister, has made fighting inflation a priority, it is likely that business will fall into line with credit, not the other way around.
Perhaps the first signs of that appeared in China’s retail sales. They were 15.8% higher in January and February than in the same two months of 2010—having grown by over 19% in the year to December. The slowing was most pronounced in car sales, partly because the government restored a 10% sales tax on small cars that had been cut in 2009. The government was restoring it now, said Liu Shangxi, an official with the Ministry of Commerce, because “the country has ridden out the crisis”. It did so largely on the back of bank lending. In recent months, that lending was threatening to carry the economy away. This week’s figures were encouraging evidence that the reins are tightening.
Lifting the Crushing Burden of Debt
by Carmen M. Reinhart, Peterson Institute for International Economics
Testimony before the hearing "Lifting the Crushing Burden of Debt" of the US House of Representatives Committee on the Budget
March 10, 2011
Thank you, Chairman Ryan and the other members of the Committee, for the opportunity to comment on the US economy and the risks for the federal budget and debt. I am currently Dennis Weatherstone Senior Fellow at the Peterson Institute for International Economics.I suspect that I was invited to this hearing titled "Lifting the Crushing Burden of Debt" because, for more than a decade, my research has focused on various types of financial crises, including their fiscal implications and other economic consequences. Specifically, some of this work has focused on the historical and international evidence on the links between public debt and economic growth.
The march from financial crisis to high public indebtedness to sovereign default or restructuring is usually marked by episodes of drama, punctuated by periods of high volatility in financial markets, rising credit spreads, and rating downgrades. This historic pattern is unfolding in several European countries at present. That situation is far from resolved and remains a source of uncertainty for the United States and the rest of the world. However, the economic effects of high public indebtedness are not limited to turmoil in financial markets. Quite often, a build-up of public debt often does not trigger expectations of imminent sovereign default and the associated climb in funding costs. But in the background, a serious public debt overhang may cast a shadow on economic growth over the longer term, even when the sovereign’s solvency is not called into question.
In a paper written over a year ago with my coauthor Ken Rogoff from Harvard University, we examined the contemporaneous connection between debt and growth. I summarize here some of the main findings of that paper and as well as our recent related work and relevant studies from the International Monetary Fund (IMF) and European Central Bank (ECB).
Our analysis was based on newly-compiled data on 44 countries spanning about 200 years. This amounts to 3,700 annual observations and covers a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. The annual observations were grouped into four categories, according to the ratio of gross central government debt to GDP during that particular year: years when debt-to-GDP levels were below 30 percent; 30 to 60 percent; 60 to 90 percent; and above 90 percent. Recent observations in that top bracket come from Belgium, Greece, Italy, and Japan.
The main finding of that study is that the relationship between government debt and real GDP growth is weak for debt-to-GDP ratios below 90 percent of GDP. Above the threshold of 90 percent, however, median growth rates fall by 1 percent, and average growth falls considerably more. The threshold for public debt is similar in advanced and emerging economies and applies to both the post World War II period and as far back as the data permit (often well into the 1800s).
Debt Thresholds: The 90 Percent Benchmark
Mapping a vague concept, such as "high debt" or "over-valued" exchange rates, to a workable definition for interpreting the existing facts and informing the discussion requires making arbitrary judgments about where to draw lines. In the case of debt, it turns out that drawing the line at 90 percent was a critical one in detecting a difference in growth performance.
A hint about how important that cutoff is comes from the fact that countries rarely allow themselves to enter that high-debt range. Pooling the debt-to-GDP data for the advanced economies over the post–World War II period reveals that the median public debt-to-GDP ratio was 36.4. Fully three-quarters of the observations were below the 60 percent criteria in the Maastricht treaty governing the European Union. About 92 percent of the observations fall below the 90 percent threshold. If debt levels above 90 percent are indeed as benign as some suggest, one has to explain why they are avoided so often over the long sweep of history. (Generations of politicians must have been overlooking proverbial money on the street).
We do not pretend to argue that growth will be normal at 89 percent and subpar at 91 percent debt-to-GDP, any more than a car crash is unlikely at 54 mph and near certain at 56 mph. However, mapping the theoretical notion of "vulnerability regions" to bad outcomes by necessity involves defining thresholds, just as traffic signs in the United States usually specify 55 mph. Subsequent work suggests that we were generous in putting the threshold so high. An analysis at the European Central Bank, for instance, presents evidence that the negative impact of debt on growth may start at a lower 70–80 percent threshold for European countries.
Debt and Growth Causality
Our analysis looked at contemporaneous relationships between average and median growth and inflation rates and debt. Temporal causality tests are not part of the analysis. But where do we place the evidence on causality? For low-to-moderate levels of debt there may or may not be one. For high levels of debt, the evidence suggests causality runs in both directions.
Our analysis of the aftermath of financial crises presents compelling evidence for both advanced and emerging markets on the fiscal impacts of the recessions associated with banking crises. There is little room to doubt that severe economic downturns, irrespective of whether they originated with a financial crisis or not, will, in most instances, lead to higher debt-to-GDP levels contemporaneously with or without a lag. There is, of course, a vast literature on cyclically-adjusted fiscal deficits making exactly this point.
A unilateral causal pattern from growth to debt, however, does not accord with the evidence. Public debt surges are associated with a higher incidence of debt crises. In the current context, even a cursory reading of the recent turmoil in Greece and other European countries can be importantly traced to the adverse impacts of high levels of government debt (or potentially guaranteed debt) on county risk and economic outcomes.
There is scant evidence to suggest that high debt has little impact on growth. Kumar and Woo (2010) highlight in cross-country analysis that debt levels have negative consequences for subsequent growth, even after controlling for other standard determinants in growth equations. For a dozen European countries a study from the European Central Bank (Chechrita and Rother, 2010) provides further evidence of negative causality from debt to growth.
I will conclude on the same note of my testimony of about a year ago before your Senate counterparts. The sooner our political leadership reconciles itself to accepting adjustment, the lower the risks of truly paralyzing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it.
This time is not different.
America's budget deficit
Mr Ryan makes his mark
Apr 5th 2011, 16:56 by G.I. | WASHINGTON
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Note: the Congressional Budget Office has now scored the Republican budget proposal. Our coverage of the analysis can be found here.
WHEN Paul Ryan, the Republican fiscal wunderkind, moved from opposition to power in last year’s midterm elections, the biggest question hanging over him was whether he would bring his radical fiscal views with him or quietly stash them in a dark corner as he settled down to the realities of governing.
Mr Ryan has answered the question today by unveiling a budget plan that, at least superficially, is almost as bold and painful as the Roadmap for America that he has flogged for years. It claims to slash the federal budget deficit from a little over 9% of GDP this year to just 1.6% by 2021. By contrast, the Congressional Budget Office reckons the deficit would fall to just 4.9% under Barack Obama’s budget. He does this without, on net, raising taxes. By closing loopholes, he would pay for a cut in the top personal and corporate rates. So how does he shrink the deficit? Through an eye-watering assault on entitlement spending, in particular health care. Mr Obama’s health care reform would be ditched, Medicaid would be converted to block grants, and traditional Medicare would be replaced with vouchers.
There are many problems with this strategy but it’s worth keeping in mind how remarkable it still is: a legislative proposal that takes dead aim at the real source of the long-term fiscal imbalance, namely, entitlements. Republicans now have an answer to editorials and Democrats demanding to know what their plan is for tackling that looming crisis. Of course, the proposal remains just that, a non-binding resolution that leaves the grimy details to other legislators who may wad them up and toss them in the rubbish bin. But for now, Mr Ryan may have turned what has long been an arcane part of the budget process, the annual budget resolution, into a focal point for long-term debate.
Mr Ryan’s "chairman's mark" for fiscal 2012 incorporates the steep cuts to discretionary spending (spending that must be authorised each year) that his party is now battling to embed in this year’s fiscal 2011 budget. It assumes the same spending on defence and security that Mr Obama did in his 2012 budget.
T
he bigger real cuts come in entitlements, also called mandatory outlays: this is spending that continues automatically from one year to the next. Instead of matching state Medicaid spending the federal government would provide block grants, as was done with welfare under Bill Clinton in the mid-1990s. This would strengthen states’ incentives to control costs, rather than having the federal government share in the cost of increased eligibility or coverage.
At present, Medicare beneficiaries typically pay premiums and deductibles in return for full coverage of a wide range of medical services. Mr Ryan proposes that starting in 2022, new enrollees receive a voucher from the federal government to buy a private plan. (He prefers the term “premium support” to vouchers, but they’re really the same thing.)
Neither block grants nor vouchers magically cures the root of rising health care costs, namely, medical inflation and rising case loads. What they do is shift the responsibility for bearing those costs to the states and to individuals. Mr Ryan rather disingenuously says his proposal would “strengthen” Medicaid. I guess you could call it that, if your idea of strengthening your son is to throw him out of the house at age 16 to fend for himself. States will no doubt welcome the freedom to shape Medicaid as they see fit; I doubt they will savour the need to raise taxes or slash services to cope with foregone federal funding.
Mr Ryan notes that with the government now paying roughly half of all health care costs, more disciplined federal funding could force efficiency into the system. However, that still leaves rising costs due to technological progress, an aging population, and the shrinking coverage offered by private sector employers. Mr Ryan’s cuts will have real consequences. The proportion of Americans with no insurance, which was set to decline significantly under Mr Obama’s plan, will rise instead. Medicare beneficiaries, who now enjoy benefits on a par with those enrolled in private plans, would instead have to accept a far less generous range of services, or pay out of pocket for more.
On taxes, Mr Ryan proposes chopping the top personal rate to 25%, from its current 35%, and from the 39.6% it is scheduled to reach if George Bush’s tax cuts expire as planned in 2013. He would also cut the top corporate rate to 25% from 35%, bringing America’s rate in line with international norms. Mr Ryan implies that his plan would be revenue neutral by eliminating loopholes and deductions.
Despite the impressive rhetoric, this is still a timid and politicised document by the standards of Mr Ryan’s original roadmap and the health care plan he proposed with Alice Rivlin, a budget director under Bill Clinton. Both contained far more detail about precisely how the entitlement changes would be implemented. Unlike the roadmap, his latest proposal completely ignores social security; apparently, you can only touch so many third rails at once. His tax reform plan is so bare bones that judging its credibility is almost impossible. Of the plan's $6.2 trillion in spending cuts over 10 years, more than a quarter come from "other mandatory" categories, without specifying which: food stamps? Pell grants? Veterans' benefits? If the Congressional Budget Office scores this plan, it may well find the numbers don’t add up.
Its projections of the economic impact are also surreal. To be sure, the plan is not as severe as Britain’s: the deficit is only 1.7 percentage points of GDP smaller in 2015 than under Mr Obama’s 2012 budget. Economic growth would be dented, but not grievously. Yet Mr Ryan, citing analysis by the Heritage Foundation, claims his plan would actually create 1m additional private sector jobs and slash the unemployment rate to 4% by 2015, compared to the Blue Chip private sector consensus of 6.6%. While the Heritage Foundation is probably not the first organisation most people turn to when seeking authoritative, impartial economic analysis, I’ll give them the benefit of the doubt. Yet when I read their report, I find the prediction of a massive investment boom utterly implausible. Corporations today enjoy record or near record profits. If government deficits were crowding out private investment (a key assumption of their analysis), short-term interest rates would not now be near zero and long-term rates near postwar lows. Mr Ryan risks undermining the credibility of his overall plan by casting its economic consequences in such an implausibly optimistic light.
The final question mark about Ryan’s plan is: what is it for? It’s a non-starter with Democrats and even fellow Republicans are going to think twice about embracing it. After all, they won last year’s midterm elections by scaring seniors into thinking Mr Obama would cut their Medicare benefits. Moreover, there is already an alternative long-term deficit reduction plan available: the one advanced by the Simpson-Bowles commission which has been embraced by a growing band of bipartisan senators. Mr Ryan was a member of the commission, but voted against its report, because it included tax increases and didn’t repeal Obamacare. Today, he offered his alternative, perhaps not as a final offer but in an attempt to drag the debate further to the right. Whether or not it succeeds, the debate is better off for having it.
Asia
Banyan
Emerging economic powers
BRICS in search of a foundation
Apr 16th 2011, 5:20 by T.P. | BEIJING
FOCUSING on what unites them and putting aside their divisions, the leaders of Brazil, Russia, India, China and, now, South Africa—the so-called BRICS countries—ended a one-day summit on China’s southern resort island of Hainan with a joint statement that calls for far-reaching changes in the global financial and political order.
The governing structure of international financial institutions, the statement said, “should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries”. The statement also calls for “comprehensive reform” of the United Nations to make the body “more effective, efficient, and representative”.
Among the more specific actions and recommendations announced were an agreement for development banks in BRICS countries to open mutual credit lines denominated in local currencies; a warning over the potential for “massive” capital inflows from developed nations to destabilise emerging economies; and support for “a broad-based international reserve currency system providing stability and certainty”.
This last item would imply something of a challenge to the worthiness of the dollar as the leading global reserve currency. Indeed, the thrust of the entire meeting was to urge a realignment of the global order imposed after the end of the second world war and the subsequent ascendancy of the United States.
Representing around 40% of the world’s population and nearly a quarter of its economic output, the BRICS countries would seem to be well justified in calling for these kinds of changes. Perhaps more to the point, with projections showing that they will account for much of the world’s economic growth in the coming decades, they are in a position to push their claim.
But the unified front they presented in Hainan masks some serious differences. They will not find it easy to co-ordinate their efforts, even in the short term. Brazil, for example, has begun to fret about the influx both of Chinese investment and cheap Chinese imports, and has joined America and other rich countries in complaining publicly about the undervalued yuan.
Relations between China and India have long been plagued by tensions over trade, border disputes, and friction due to China’s political and military support for India’s rival, Pakistan. Bilateral trade is a mere fraction of what it might be for the two giant neighbours, each with a population exceeding a billion and together presenting vast potential for trade complementarities. Total trade between the two dynamos is expected to reach only $100 billion by 2015, and the balance falls heavily in China’s favour (India’s trade deficit with China was about $ 20 billion last year).
In a move that India’s press corps has portrayed as something of a snub to China, its prime minister, Manmohan Singh, chose not to attend the Bo’ao Forum, scheduled a day after and a short distance away from the site of the BRICS summit. But the two sides did use the summit as an occasion to announce a resumption of defence exchanges. These were halted last year in a tiff over China's reluctance to recognise India's territorial claims in Kashmir.
When it comes to the UN Security Council, China may not be in such a rush to see greater representation, at least not among the permanent members. BRICS solidarity notwithstanding, China, together with Russia, enjoys a spot on that exclusive five-member body and will not be keen to see its power there diluted. At the end of the day, there will be no getting around the fact that this new block of BRICS is made up of unequal parts.