By Michael Pomerleano
Paradigms accepted as self-evident truths occasionally need to be re-examined. Corporate taxation is one of them. While governments are looking more and more for fiscal resources to fill budget gaps under the auspices of “rationalizing” the corporate tax systems, this article argues that a new, minimalistic approach to corporate taxation can yield surprising benefits. Read more
By Catharine B. Hill
The recession continues to create challenges for higher education in the US. Appropriate responses depend on expectations for the economy in the future, and whether the shocks we have experienced are short- or longer-term trends. Moody’s US Higher Education Outlook Negative in 2013 report does little to address these issues.
The optimal response to a cyclical change is to not allow significant changes to the structure of the colleges and universities. But if a change is permanent, adjustments are warranted. Of course, it is difficult to know whether shocks are permanent or temporary – there is a tendency to assume positive shocks are permanent and negative ones temporary, leading to inappropriate policy responses when wrong. This explains some of the problems facing many colleges and universities. Read more
By Heleen Mees
There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist.
Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly (2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.
Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth. Read more
By Eswar Prasad and Karim Foda
The world economy is showing scattered signs of vigor but remains on life support, mostly provided by accommodative central banks. Concerns about spillover from a worsening of the European debt crisis and slowing growth in key emerging markets are putting a damper on consumer and business confidence. Equity markets are pulling back from a robust performance in the first quarter of this year as the sobering reality of a continued anemic recovery weakens investors’ optimism.
There are some positive signs in the latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER), but also much to worry about as the world economy continues to meander with no clear sense of direction. Read more
By Olafur Arnarson, Michael Hudson and Gunnar Tomasson
Today, from Greece to Iceland, governments are acting as enforcers or even as collection agents on behalf of the financial sector — and Iceland stands as a dress rehearsal for this power grab.
The problem of bank loans gone bad has thrown into question just what should be a “fair value” for these debt obligations. The answer will depend largely on the degree to which governments back the claims of creditors. The legal definition of how much can be squeezed out is becoming a political issue pulling national governments, the IMF, ECB and financial agencies into a conflict, pitting banks, vulture funds and debt-strapped populations against each other. Read more
By Eswar Prasad and Karim Foda
The world economy has hit a rough patch on the road to recovery and is in danger of skidding off course.
The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) reveals abundant cause for gloom. The general picture among G20 economies is one of slowing growth, swooning financial markets, and declining consumer and business confidence.
A series of adverse shocks, coupled with political wrangling that has stymied effective policymaking and added to uncertainty, has crippled growth in advanced economies. Emerging markets have maintained strong growth so far, but the battle against domestic inflation and weaknesses in major export markets are beginning to affect their growth as well.
Debt crises, weak employment growth and policy dithering in the major advanced economies have exacerbated global economic uncertainty. The perception of rising risk and inadequate policy responses has shaken financial markets and dented confidence around the world. Reflecting widespread anxiety and fear about global economic prospects and the lack of obvious policy solutions, stock markets around the world have taken a beating over the past summer. Read more
By Eswar Prasad and Mengjie Ding
Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies. These rising debt levels combined with heightened concerns about fiscal solvency now constitute a major threat to global financial stability.
Recent events in Greece, Ireland, Portugal and other economies on the periphery of the eurozone show the risks of debt buildups that are not tackled. Bond investors can quickly turn against a vulnerable country with high debt levels, leaving the country little breathing room to balance its fiscal books and precipitating a crisis.
Overall, the worldwide picture of government debt is not pretty. Read more
The US fiscal stimulus, we argue, led primarily to increasing imports and suppression of export growth. Read more
Take a scary idea that sounds reasonable, repeat it often enough, and people begin to take it as truth. Unfortunately, current beliefs about US Treasury debt and deficits are a prime example of this principle: the US is being scared into seeking exactly the wrong sort of policy. Read more
Widespread agreement exists that the international monetary system needs reform. The present system, dominated by reserve holdings of US dollars, places an unsustainable burden of creating reserves on the US. Read more
In August of 2010, I argued on this forum that the Fed should expand its policy of Quantitative Easing. By now the US is well into a programme that, by the end of June 2011, will have added $600bn to the Fed’s balance sheet. There is widespread discussion of what to do next. Read more
By Eswar Prasad and Karim Foda
Despite a number of recent shocks, the global economic recovery is getting on to a firmer footing.
The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) indicates that resurgent job growth and rising business and consumer confidence are solidifying the recoveries in many advanced economies. Emerging markets are still doing well but some of the shine is coming off these economies as they tighten policies to cope with inflationary pressures.
The Overall Growth Index for the G20 economies shows a slight uptick in recent months, led by a gradual rebound in real activity. After the initial post-recession surge, financial markets have pulled back a bit, at least in terms of growth in stock market indexes and valuations. One bright spot is the resurgent business and consumer confidence in both advanced and emerging economies. Read more
Our arguments about the US federal budget are now all about deficits and debt: the effect of the budget on the budget. We are cutting government spending with little thought to the value of the public services forgone, and no thought at all to the effect on production, jobs and incomes. Read more
In 2008 President Obama captured the nation with a message of change, yet in office he has chosen to deliver change of style rather than change of substance. At the headline level this choice was reflected in his call for bi-partisanship that looked to split the difference with Republicans. In economic policy, it was reflected in the wholesale reappointment of the Clinton administration team led by Larry Summers and Timothy Geithner, a case of continuity not change.
Now, the administration is sinking under the failure of its economic policy. Read more
Ben Bernanke, US Federal Reserve chairman, has announced that the Fed is about to go on a $600bn spending spree by buying $75bn of treasury bonds every month for eight months. Not all of the members of the Federal Reserve Open Market Committee agree that a second round of quantitative easing is a good idea. Read more
If he were still alive today, what would Milton Friedman think of his disciple, Ben Bernanke? This is a matter of some concern to the Fed chairman, who is reported as saying to colleagues on Saturday: “I grasp the mantle of Milton Friedman…I think we are doing everything (he) would have us do.” With libertarian economists tending to be among those most critical of QE2, Mr Bernanke is relying on Friedman’s halo effect to enhance the legitimacy of the Fed’s recent actions. Friedman’s friends say that his opinions were unpredictable, which is what made them interesting. But some some free market economists, like Allan Meltzer, claim that Friedman would have strongly disapproved of QE2. Are they right? Read more
After a week which has been replete with important economic and political news from the US, the bulk of the incoming information has confirmed what we knew already. The Fed has embarked on QE2, more or less exactly as expected. The Republicans took the House but not the Senate, and the President’s initial reaction suggests that the Bush tax cuts will probably be extended, which was the central case before the election. And the economy continues to grow at a pace which is neither fast enough to bring unemployment down, nor slow enough to threaten a double dip. While all of this was broadly as expected, there have been some interesting (and mostly encouraging) developments which are worth noting.
So what do we know today that we did not know a week ago? Three things: Read more
The Fed statement just released indicates that the central bank intends to purchase a net total of $600bn of longer term Treasury securities between now and the end of 2011 Q2, at a pace of around $75bn per month. This was almost exactly in line with what the market had been led to expect, so there was no surprise in the extent and timing of QE2. However, there was no further softening in the Fed’s statement that interest rates are likely to remain exceptionally low for an “extended period”, which may have disappointed some observers who were looking for this language to shift in a dovish direction. Overall, the markets initial reaction was a shrug of acceptance that the Fed has done just about what it told us it would do, but certainly no more. Read more
By Francis Bator
Sir Andrew Large, former deputy governor of the Bank of England, advises the US to soon follow the UK example of fiscal surgery (in a letter to the FT on October 22). He appears to believe that the US too is “living beyond its means,” so “reductions in gross national product from… public spending cuts are inevitable”.
Not so, for the time being at least. True we continue to spend more on goods and services than we produce, importing more than we export to cover the difference ($539 bn/year in the second quarter = 3.75 per cent of gross domestic product). But we currently spend much less — and therefore produce much less — than our capacity to produce. Read more
Mr President, With hopes of a V- or U-shaped recovery fading, there is the increasing prospect of an L-shaped future of long stagnation, or even a W-shaped future in which W stands for something worse. The reason for this dismal outlook is economic policy is trapped by failed conventional thinking that can only deliver wage stagnation and prolonged mass unemployment. Read more